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Enterprise 

AND  THE 

Productive  Process 


A  THEORY  OF    ECONOMIC    PRODUCTIVITY    PRESENTED    FROM 

THE  POINT  OF  VIEW  OF  THE  ENTREPRENEUR  AND  BASED 

UPON  DEFINITIONS,  SECURED  THROUGH  DEDUCTION 

(and    presumably,    THEREFORE,    PRECISE    AND 

FINAL)  OF   THE   SCOPE   AND    FUNDAMENTAL 

TERMS  0FTHE  SGI3NCE  O?  .pOCNOMICS 


BY 


FREDERICK  BARNARD  HAWLEY,  B.A 

If 

(Formerly  Treasurer  of  the  American  Economic  Association) 


G.   P.   PUTNAM'S  SONS 

NEW  YORK  AND  LONDON 

(Tbe  ftniclterbocfter  f>ted0 

1907 


•  •    •  •< 

•  •    •  •  I 
•     •    ••  • 


:*:/:*-.«v  :  :.,:;•:•.• 

FREDERICK  BARNARD  HAWLEY 


Ube  ftnicfterboclter  |>re00>  l^ew  ISo(ft 


PREFACE 

THE  present  age  is  markedly  one  of  social 
and  industrial  evolution,  differing  from 
previous  eras  not  only  in  the  rapidity  with 
which  changes  are  effected  and  in  their  radical 
character  and  wide  influences,  but  also  in  the 
fact  that  social  and  economic  development  is 
more  and  more  consciously  directed.  In  the 
ancient  civilisations  which  have  arisen,  culmin- 
ated, and  declined,  there  was  practically  no 
attempt  at  intelligent  guidance.  Proximate 
and  immediate  benefits  to  individuals,  classes, 
and  communities  were  alone  considered.  And 
this  is  equally  true  of  feudalism  and  the  Middle 
Ages — the  first  stages  of  our  present  civilisation. 
Such  progress  as  was  slowly  obtained  was 
wholly  due  to  the  survival  of  the  unconscious 
fittest.  There  was  little  or  no  intelligent  and 
well  directed  effort  to  fit  society  in  general  to 
survive  and  progress.  The  intensity  of  class 
struggles  necessarily  precluded  any  vital  con- 
ception   of    society   as    an   harmonious  whole 


MS8556 


iv  Preface 

capable  of  higher  and  higher  development 
under  intelligent  direction.  This  glorious  pos- 
sibility has  indeed  occurred  to  many  isolated 
individuals,  especially  the  advocates  of  Social- 
ism and  the  great  religious  teachers,  who  have 
done  something  towards  its  accomplishment, 
but  until  very  lately  there  has  been  no  con- 
certed action  tending  to  the  application  of 
scientific  principles  to  the  social  and  industrial 
evolution  of  the  nation  and  the  race.  The  in- 
dividualism which  found  its  scientific  expression 
in  the  dogma  of  "  laissez  faire,"  so  very  lately 
discarded,  is  indeed  a  practical  denial  of  the 
possibility  we  are  discussing — which  can  only 
arise  from  concerted  action,  that  subordinates 
individual  to  social  interests,  and  that  can  only 
be  effected  in  two  ways,  namely  through  regu- 
lation by  the  State  or  by  individuals  generally 
abandoning  such  advantages  as  are  disadvan- 
tageous to  others. 

But  whether  accomplished  by  disinterested 
benevolence  or  by  the  State,  consciously  di- 
rected evolution  can  only  be  intelligent  when 
governed  by  principles  scientifically  established, 
and  both  individuals  and  soci'-ty  must  depend 
upon  Sociology  and  Economics  for  such  prin- 
ciples. Unfortunately  neither  of  these  sciences 
is  accepted  as  authoritative.  Sociology  is  in  a 
confessedly  chaotic  and  undeveloped  condition, 


Preface'  v 

but  is  only  incidentally  under  consideration  in 
this  treatise  to  the  extent  in  which  the  prin- 
ciples involved  in  our  discussion  of  Economics 
are  adaptable  to  the  definition  of  Sociology  also 
and  make  plain  the  line  of  demarcation  between 
the  two  sciences. 

In  Economics,  however,  a  great  deal  has 
been  accomplished  and  a  very  considerable 
body  of  doctrine  exists,  which  because  there  is 
no  serious  dissent  should  perhaps  be  regarded 
as  authoritative.  The  trouble  is  that  it  is  so 
regarded  only  by  a  limited  circle  of  specialists. 
Another  considerable  body  of  doctrine  regarded 
as  authoritative  by  most  of  the  competent,  is 
yet  disputed  by  some.  Still  another  body  of 
doctrine,  especially  attractive  to  logicians  and 
specialists  because  of  the  brilliant  ratiocination 
of  its  exposition,  is  really  scholastic — founded, 
that  is,  on  assumed  premises,  subjectively  true 
perhaps  but  of  no  assured  objective  value. 

It  is,  however,  hardly  an  exaggeration  to  say 
that  there  is  no  considerable  body  of  economic 
doctrine  accepted  as  authoritative  by  the 
generally  educated,  and  the  "man  in  the  street" 
is  altogether  a  scoffer.  Why  is  this?  Publishers 
tell  us  that  the  interest  in  orthodox  economic 
works  has  greatly  declined  and  yet  there  never 
was  a  time  when  sounder  treatises  were  being 
issued   or  when  the   public  attention  was  so 


vi  Preface 

absorbed  in  the  solution  of  practical  economic 
and  social  problems.  On  the  other  hand,  any 
writer  is  sure  of  a  good  audience  who  treats 
these  subjects  sympathetically,  however  crass 
his  ignorance,  poor  his  judgment,  or  Utopian 
his  schemes — especially  if  he  has  some  gift  of 
literary  expression.  It  is  indeed  true  that  the 
public  is  rightly  influenced  in  its  decisions  by 
sympathy  as  well  as  by  reason,  and  that  practi- 
cal economic  and  social  matters  are  especially 
close  to  our  hearts.  But  the  cruelty  and  selfish- 
ness of  allowing  ourselves  to  be  guided  by 
unintelligent  sympathy  is  now  so  well  recog- 
nised that  the  distrust  of  economic  theory — our 
natural  instructor — is  difficult  to  understand. 

Can  it  be  that  economic  theory  is  tainted 
with  scholasticism  at  its  very  source  and  that 
the  public  in  its  dim  but  sure  way  has  detected 
this  ?  Possibly  some  will  say  it  is  not  this  but 
the  complicated  character  of  economic  pheno- 
mena, the  abstractness  of  its  principles,  the 
difficulty  of  the  subject  itself  that  has  raised 
economic  dogma  above  the  comprehension  of 
all  but  specialists.  But  are  not  these  circum- 
stances the  very  earmark  of  scholastic  disquisi- 
tion ?  When  is  any  theory  hard  to  understand 
and  instinctively  felt  to  be  dubious?  Is  it 
not  just  when  one  or  more  of  its  underlying 
premises   are   not    accurately   comprehended  ? 


Preface  vii 

What  are  the  underlying  premises  of  Econom- 
ics? Surely  they  are  the  scope  of  the  science 
itself — the  four  productive  factors,  the  function 
peculiar  to  each  of  them,  and  the  nature  of  the 
reward  attributable  to  the  exercise  of  each 
function.  But  these  are  exactly  the  things  that 
orthodox  economists  have  not  succeeded  in 
settling  among  themselves.  Each  thinker  has 
of  course  more  or  less  precise  and  distinct  con- 
ceptions in  his  own  mind,  but  these  conceptions 
do  not  agree  with  those  of  other  economists, 
and  there  is  no  hope  of  their  agreeing  until 
some  way  is  found  of  arriving  at  definitions  of 
these  fundamental  terms  which  any  one  who 
understands  them  is  under  a  logical  necessity 
of  accepting.  This  accomplished,  a  foundation 
for  public  confidence  will  at  least  be  laid  and 
practical  applications  made  possible  which 
should  prove  especially  valuable  during  the 
period  of  critical  economic  changes  through 
which  we  are  passing. 

Despite  the  popular  accusation  against  Eco- 
nomics that  it  is  not  an  inductive  science,  the 
course  of  investigation  largely  and  the  develop- 
ment of  theory  almost  wholly  have  been  from 
the  particular  to  the  general.  The  fundamental 
truths  have  been  looked  upon  as  the  final  goal 
of  investigation,  and  it  is  due  to  this  that  they 
have  not  been  accurately  defined.     It  has  ap- 


viii  Preface 

peared  to  the  writer  that  though  a  vast  amount 
of  probably  true  theory  can  be  and  has  been  so 
developed,  we  can  never  be  quite  sure  of  any 
deduced  results,  and  that  therefore  Economics 
will  remain  somewhat  scholastic  and  lacking 
in  authority,  and  more  or  less  inapplicable  to 
the  solution  of  our  practical  economic  difficul- 
ties, until  the  fundamental  conceptions  of  the 
science  are  authoritatively  settled.  This  is  just 
what  the  author  has  attempted  to  further  in 
this  treatise.  Of  course  his  first  appeal  is  to 
the  specialists,  and  he  must  be  judged  by  them. 
But  if  it  turns  out  that  he  is  correct,  it  is  the 
educated  who  are  not  specialists  and  even  more 
the  "  man  in  the  street "  whom  he  particularly 
desires  to  reach,  because  it  is  through  them  that 
any  practical  influence  the  book  may  have  must 
be  exerted.  Fortunately  for  his  purpose  the 
author  has  been  able  to  formulate  a  novel  con- 
ception of  the  productive  process  which  isat  least 
clear  cut,  consistent,  and  untechnical,  and  which 
should  therefore  be  readily  comprehensible  by 
the  reader  of  average  culture.  And  what  is 
more  important  he  ventures  to  hope  and  believe 
that  this  conception  has  been  arrived  at  by  a 
method  which  will  command  the  assent  of  all 
those  to  whom  he  shall  succeed  in  making  his 
meaning  clear. 

He  is  however  unhappily  conscious  that  in 


Preface  ix 

the  development  of  his  argument  he  is  forced 
to  make  somewhat  heavy  demands  upon  the 
reader,  due  partly  to  the  novelty  and  difficulty 
of  the  subject  and  partly  to  his  own  short- 
comings in  presenting  it.  This  treatise  is  an 
attempt  at  the  resolution  of  three  distinct  pro- 
blems, which  are  yet  so  intimately  connected 
and  so  mutually  dependent  that  they  cannot 
well  be  presented  separately.  He  has  been 
forced,  therefore,  into  treating  them  in  the 
main  conjointly,  though  of  course  they  have 
been  separated  so  far  as  was  possible,  in  which 
respect  an  abler  disputant  would  doubtless 
have  succeeded  better.  As  a  consequence  of 
this  manner  of  presentation,  the  author,  in 
treating  each  problem,  has  been  forced  to  anti- 
cipate largely  what  he  has  to  say  of  the  others, 
and  has  been  obliged  to  indulge  in  repetitions 
and  re-statements  that  would  have  been  un- 
necessary if  he  had  been  able  to  present  each 
problem  by  itself  and  develop  his  train  of 
argument  more  consecutively.  Hardly  any 
reader,  especially  any  perfunctory  reader,  pass- 
ing upon,  and  deciding  upon  in  his  own  mind, 
each  separate  proposition  as  he  comes  to  it,  will 
be  able  to  grasp  the  author's  concept  of  the 
productive  process  as  a  whole.  He  feels,  there- 
fore, that  he  has  a  right  to  ask  the  reader  to 
reserve  his  judgment,  and  not  to  pass  upon  him 


X  Preface 

piecemeal,  until  he  has  familiarised  himself  with 
the  whole  scope  of  the  argument. 

This  request  is  the  more  essential  because 
some  of  the  separate  claims  and  statements 
standing  alone  and  unsupported  will  appear  to 
conflict  with  propositions  usually  regarded  as 
settled,  and  the  reader  who  refuses  to  reserve 
his  judgment  about  them  will  not  be  as  open 
to  conviction  when  the  completed  justification 
of  them  IS  finally  stated. 

Moreover,  this  treatise  is  substantially  a 
criticism  of  the  most  fundamental  ideas  and 
definitions  in  the  Science  of  Economics,  and  it 
is  but  natural  to  human  nature  to  distrust  and 
antagonise  any  one  disturbing  settled  usages 
and  opinions,  especially  when  such  usages  and 
opinions  have  served  as  the  premises  upon 
which  a  great  part  of  the  thought  and  work  of 
our  lives  has  been  based.  The  author  can 
honestly  say,  however,  that  he  has  not  written 
in  the  spirit  of  an  advocate  desirous  of  estab- 
lishing some  fad  or  fancy  or  preconceived  idea, 
but  solely  in  the  hope  of  making,  through 
investigation  in  an  untrodden  field,  an  addition 
to  the  sum  of  scientific  truth,  and  without  any 
regard  for  the  corollaries  deducible  therefrom, 
except  to  the  extent  in  which  they  illustrate 
and  enforce  the  truth  itself.  And  he  is  con- 
fident  that   this  will  be  appreciated,  and  his 


Preface  xi 

Theory  of  the  Productive  Process  be  given  fair 
and  unbiassed  judgment,  despite  any  natural 
predisposition  against  some  of  its  conclusions 
that  may  be  aroused.  These  conclusions,  such 
as  they  are,  have  been  reached  by  a  more 
rigid  application  than  is  common  of  the  well 
recognised  principles  that  have  governed  past 
economic  discussion — or,  at  least,  that  has  been 
the  constant  aim  of  the  author — and  he  is  con- 
fident that  his  effort  will  be  recognised  as  only 
a  conscientious  attempt  to  carry  economic 
analysis  a  little  farther  along  the  line  of  its 
natural  evolution. 

As  to  the  practical  bearing  of  the  matters 
discussed  in  this  treatise,  it  should  be  sufficient 
to  point  to  the  fact  that  every  proposal  of 
socialism,  of  municipal  ownership,  of  State 
regulation  of  industry,  of  the  policy  of  pro- 
tection, in  short  all  proposed  legislation  affect- 
ing production,  is  necessarily  a  proposal  to 
restrain,  modify,  or  regulate  the  actions  and 
relations  of  the  economic  factors  of  production. 
It  is  surely  self-evident  that  interference  with 
the  course  of  industry  will  be  intelligent  and 
beneficial  in  the  exact  degree  of  our  under- 
standing of  the  forces  to  be  regulated.  But  it 
is  exactly  about  the  character  and  relations  of 
these  forces  that  no  **  consensus  of  the  com- 
petent" has  been  reached.     If,  therefore,  this 


%n  '       Preface 

treatise  accomplishes  anything  towards  obtain- 
ing such  a  consensus,  and  its  Theory  of  the 
Productive  Process  is  established,  an  under- 
standing of  the  involved  conceptions  of  the 
productive  functions  is  an  absolute  necessity 
to  any  constructive  statesman  who  wishes  his 
work  to  endure. 

In  various  articles  contributed  by  me  to  the 
Quarterly  Journal  of  Economics  (Harvard) 
some  few  of  the  ideas  here  advanced  have  ap- 
peared, but,  necessarily  from  lack  of  space, 
disconnected  from  their  connotations  and  with- 
out logical  sequence,  so  that  this  presentation 
of  my  Theory  of  the  Productive  Process  is 
practically  my  first  appeal  to  the  judgment  of 
fellow-students. 

Frederick  Barnard  Hawley. 


CONTENTS 

PAGE 

PREFACE iii 

CHAPTER  I 
PRESENT  THEORETICAL  POSITIONS  .  I 

CHAPTER  II 
METHOD l6 

CHAPTER  III 
PRINCIPLES  APPLICABLE  TO  DEDUCTIVE 

CLASSIFICATION         ....  35 

CHAPTER  IV 
A  POSITIVE  DEFINITION  OF  ECONOMICS  .  53 

CHAPTER  V 
THE  INTENDED  LINE  OF  ARGUMENT        .  90 

CHAPTER  VI 
ENTERPRISE I06 


xiv  Contents 

PACK 

CHAPTER  VII 
OPPORTUNITY l6o 

CHAPTER  VIII 
CAPITAL 206 

CHAPTER  IX 
LABOUR 268 

CHAPTER  X 
THE  PRODUCTIVE  PROCESS        .  .  .      306 

CHAPTER  XI 
TRADE-UNIONS  AND  STRIKES     .  .  -352 

CHAPTER   XII 
THE  TRUSTS 4^2 

CHAPTER   XIII 
SOCIALISM 431 

CHAPTER  XIV 
CONCLUSION 448 


ENTERPRISE  AND 
THE   PRODUCTIVE   PROCESS 


ENTERPRISE  AND 
THE   PRODUCTIVE   PROCESS 


CHAPTER  ;i;/,\;^  J  I;   ^^^^^ 

PRESENT   THEORETICAL  POSITIONS 

WHEN  Adam  Smith  revolutionised  the 
Science  of  Economics,  he  halted  in  his 
analysis  at  two  very  important  points  which,  as 
every  specialist  will  admit,  his  successors  have 
not  yet  succeeded  in  fully  resolving.  These 
two  yet  dubious  matters  are  the  precise  func- 
tion of  the  entrepreneur,  and  the  exact  scope 
of  the  science  itself.  And  it  is  in  the  hope  of 
contributing  something  to  the  resolution  of 
these  two  problems,  and  to  the  establishment 
of  a  method  of  testing  economic  definitions  that 
affords,  when  applicable,  a  means  by  which  the 
proper  content  of  economic  terms  can  be  more 
authoritatively  and  definitely  settled,  that  this 
treatise   is  written.      The  writer  believes  that 


2       Enterprise  and  Production 

the  discussion  will  develop  a  logical  connection 
between  these  three  problems  much  closer  than 
would  naturally  be  suspected,  and  that  their 
relations  are  really  so  intimate  as  to  preclude 
the  separate  resolution  of  either  of  them.  The 
results  of  a  further  solution  of  problems  so 
fundamental  cannot  of  course  be  expected  to 
.  agree  with  accepted  dogma  in  every  particular, 
.but  lhe;^ufhor's  purpose  is  not  at  all  to  attack 
.established  conclusions,  except  as  it  becomes 
incictehially;  n'ei:^ssary  to  his  attempt  to  carry 
economic  analysis  beyond  the  points  it  has  at 
present  reached  in  these  three  directions. 

It  will  surely  be  difficult  to  find  an  economist 
who  would  claim  that  he  possesses  a  standard, 
conformity  to  which  can  be  demanded  in  eco- 
nomic definitions  and  in  the  use  of  economic 
terms ;  or  that  the  function  of  the  entrepreneur 
and  the  nature  of  profit  are  thoroughly  under- 
stood ;  or  that  he  is  aware  of  any  fully  satisfac- 
tory definition  of  the  science  itself.  It  will 
therefore  readily  be  admitted  that  the  writer's 
present  attempt  is  in  a  permissible  direction, 
and  if  the  result  proves  inadequate  he  may 
yet  have  the  satisfaction  of  calling  atten- 
tion to  a  field  for  investigation  that  demands 
research. 

As  this  work  is  not  to  be  controversial,  it 
will  hardly  be  deemed  necessary  for  me  to  enter 


Present  Theoretical  Positions      3 

into  an  elaborate  investigation  of  what  others 
have  advanced  in  relation  to  our  three  pro- 
blems. A  concise  statement,  mainly  for  the 
convenience  of  the  general  reader,  can  be  made 
of  the  present  view  of  these  matters,  sufficient 
for  the  purposes  of  the  argument,  and  from 
which,  I  think,  there  will  be  no  serious  dissent. 
First,  as  to  definition  and  use  of  terms. 
Economists  sometimes  verbally  and  sometimes 
silently,  but  almost  universally,  claim  the  priv- 
ilege of  such  usages  and  definitions  as  they 
consider  best  suited  for  expounding  their  own 
particular  views  of  any  subject  under  discus- 
sion, provided  they  are  consistent  as  to  con- 
tent ;  and  examples  are  not  wanting  of  writers 
deliberately  using  a  given  term  in  one  sense 
for  the  discussion  of  one  subject,  and  with  a 
different  content  in  the  treatment  of  other  sub- 
jects. This  is  perfectly  justifiable  whenever 
the  content  of  any  given  term  has  not  been 
authoritatively  settled,  but  the  custom  neces- 
sarily entails  a  great  deal  of  misunderstanding 
and  confusion  of  thought.  Controversial  dis- 
agreement is  very  largely  due  to  slight  differ- 
ences in  content  in  the  use  of  the  same  term 
by  two  disputants,  and  it  is  a  common  thing 
for  one  of  them  to  charge  his  opponent  with 
having  unconsciously  changed  the  content  of 
some  of  his  terms.     Manifestly  so  long  as  the 


4        Enterprise  and  Production 

possibility  exists  of  changing  the  content  of  a 
term  or  of  persons  differing  as  to  their  under- 
standing of  the  content — so  long  that  is  as  we 
are  not  absolutely  sure  of  our  terms — positive 
and  established  results  cannot  be  obtained. 
Even  when  an  expositor  has  expressed  his  idea 
as  to  content  so  unequivocally  that  he  cannot 
be  misunderstood,  a  reader  in  whose  mind  a  dif- 
ferent concept  has  been  firmly  imbedded  finds 
it  difficult  to  follow  the  argument  and  indeed 
is  pretty  sure  to  misapprehend  it.  And  the 
slighter  the  difference  in  concept,  the  more 
difficult  is  Its  detection  and  the  more  certain 
are  misconceptions  to  arise. 

This  is  forcibly  illustrated  in  the  controversy 
at  present  being  carried  on  between  two  very 
distinguished  and  able  economists.  Professor 
John  B.  Clark  and  Professor  Bohn-Bawerk  of 
Germany,  over  the  capital  concept.  The  idea 
of  the  latter,  which  is  also  the  idea  generally 
held  before  Professor  Clark  proposed  his  amend- 
ment, is  that  capital  is  composed  of  the  actual 
aggregate  of  "capital  goods,'*  created  as  they 
are  produced  and  destroyed  as  they  are  con- 
sumed. The  former  regards  it  as  a  fund  which, 
like  a  river,  preserves  its  identity  despite  the  flow 
of  appearing  and  disappearing  commodities. 
According  to  the  principle  of  this  treatise  neither 
concept  is  correct,  though  Professor  Clark's  view 


Present  Theoretical  Positions     5 

is  a  decided  advance  in  the  right  direction.  He 
is  correct  as  to  capital  being  a  fund  instead  of 
an  aggregate,  but  wrong,  if  I  understand  him 
correctly,  as  to  the  composition  of  the  fund, 
which  is  not  a  flow  of  "  capital  goods  "  or  com- 
modities. The  correct  conception  of  capital  is 
that  it  is  a  fund  of  unexpended  purchasing 
power,  or,  in  other  words,  an  aggregate  of  un- 
exerted  claims  on  commodities  in  general  and 
not  an  aggregate  of  specific  claims  on  specified 
things.  As  the  total  power  to  purchase  can  be 
no  greater  or  less  than  the  total  of  purchasable 
things,  the  aggregate  of  capital  varies,  to  be  sure 
exactly  with  the  aggregate  of  investments,  but 
that  is  far  from  identifying  a  claim  and  the 
thing  claimed — the  farm  and  the  mortgage  upon 
it.  How  far  astray  the  ablest  logicians  can  be 
led  by  an  inadequate  conception  is  forcibly 
illustrated  by  this  very  controversy.  Professor 
Bohn-Bawerk  has  written  a  work  on  Capital 
and  Interest  (justly  regarded  as  among  the 
ablest  and  most  learned  of  recent  publications), 
the  whole  argument  of  which  is  directed  to  prove 
that  interest  arises,  not  from  abstinence  or  from 
the  productivity  of  capital,  but  from  the  "  ripen- 
ing "  of  capital  in  the  sense  of  **  an  aggregate 
of  capital  goods,"  oblivious  of  the  fact  that 
"  capital  goods  "  do  not  *'  ripen  "  at  all  in  the 
hands  of  the  capitalist  as  such,  who  is  the  re- 


6        Enterprise  and  Production 

ceiver  of  interest,  but  do  **  ripen  "  in  the  hands 
of  the  entrepreneur,  who,  as  such,  is  necessarily 
the  only  possible  owner  of  "  capital  goods  "  and 
to  whom  interest  is  a  cost.  Or,  in  other  words, 
the  "  ripening  of  capital  goods  '*  yields  profit  or 
loss,  but  never  interest.  It  is  indeed  somewhat 
curious  that  no  one  seems  to  have  been  struck 
with  the  inherent  absurdity  of  the  idea  that 
capital  is  what  it  is  invested  in,  and  that  two 
bulky  volumes,  really  wonderful  in  their  acute- 
ness  arid  the  lucidity  of  their  logical  deductions, 
should  have  been  written  to  develop  an  argu- 
ment founded  on  a  misconception  so  gross  as 
to  amount  to  a  contradiction  in  terms.  Surely 
the  necessity  of  authoritatively  determining 
fundamental  terms  before  employing  them  as 
premises  could  not  be  more  forcibly  illustrated. 
I  do  not  mean  of  course  to  assert  that  econo- 
mists generally  convert  this  privilege  into  license 
by  greatly  perverting  commonly  accepted  mean- 
ings, or  by  persisting  in  the  use  of  terms  with 
especially  incongruous  contents.  On  the  con- 
trary, looseness  of  expression  is  always  involun- 
tary and  tends  to  amendment  when  pointed  out- 
Consequently  there  has  been  a  constant  progress 
from  worse  to  better  in  a  growing  consensus  in 
usage  and  definition  among  recognised  author- 
ities. But  finality  can  hardly  be  attained  by 
this  method,  for  we  have  no  means  by  which 


Present  Theoretical  Positions     7 

we  can  be  assured  that  we  have  progressed  from 
better  to  best,  and  it  is  only  the  best  that  can 
demand  universal  concurrence  or  be  safely  used 
as  a  basis  for  deduction.  Theoretically,  of 
course,  this  is  possible,  for  the  process  employed 
is  simply  the  usual  one  of  verifying  inductions, 
and  any  induction  can  be  considered  as  fully 
verified  when  found  to  be  in  exact  agreement 
with  all  the  facts  involved.  Unfortunately, 
to  assure  ourselves  of  this  agreement  is 
usually  a  practical  impossibility  when  dealing 
with  such  a  heterogeneous  mass  as  economic 
phenomena.  That  no  consensus  as  to  the  exact 
content  of  fundamental  economic  terms  exists  is 
only  too  evident  in  economic  controversy,  so 
large  a  part  of  which  is  taken  up  with  attempts 
to  settle  them  by  means  of  observation  and  in- 
duction. Probably  there  are  very  few  economic 
usages  or  definitions  for  which  any  one  would 
care  to  claim  an  absolute  infallibility — that  is 
the  precise  accuracy  which  commands  accept- 
ance as  a  logical  necessity.  The  writer,  later  in 
this  work,  will  point  out  another  method  of 
arriving  at  the  proper  content  of  economic  terms, 
which  he  hopes  will  be  accepted  as  affording  this 
logical  necessity  for  at  least  some  of  the  funda- 
mental conceptions  of  the  science.  All  that 
concerns  us  at  this  point  of  our  argument  is  to 
emphasise  the  undisputed  fact  that  the  exact 


8        Enterprise  and  Production 

content  of  none  of  them  has  been  definitely 
settled  and  accepted. 

Second,  as  to  the  scope  and  definition  of 
Economics.  There  is  no  necessity  of  giving  a 
list  of  the  definitions  proposed  by  a  number  of 
the  more  prominent  economists  who  have  form- 
ally, or  by  implication  in  the  names  given  their 
treatises,  attempted  the  problem. 

The  criticising  of  each  of  these  multitudinous 
definitions  in  detail,  for  the  purpose  of  detect- 
ing deficiencies,  and  thus  arriving  at  a  true 
result  by  the  process  of  elimination,  would  be 
a  mere  continuation  of  the  process  by  which 
they  were  originally  obtained,  and  while  it 
might  discredit  some  present  conceptions  could 
hardly  arrive  at  any  authoritative  result.  It 
will  suffice  our  present  purpose  if  we  are  able 
to  detect  the  purpose  common  to  them  all. 
This  common  conception  appears  to  the  writer 
to  be  this:  that  the  science  of  Economics  is 
concerned  with  only  a  part  of  the  means  and 
methods  by  which  certain  kinds  of  human  well- 
being  or  "weal"  are  acquired,  to  the  exclusion 
of  certain  other  means  and  methods  and  of 
certain  other  kinds  of  weal.  And  it  is  in  draw- 
ing the  line  between  the  included  and  the 
excluded  human  activities  that  these  definitions 
diverge.  Now  it  is  more  than  probable  that 
an  authoritative  definition  of  the  Science,  when 


Present  Theoretical  Positions      9 

one  is  obtained,  will  afford  the  exact  line  of 
demarcation  somewhat  blindly  sought  for  in 
previous  definitions.  But  it  must,  it  appears 
to  the  writer,  differ  from  all  definitions  yet  pro- 
posed in  this,  that  it  will  be  founded  on  some 
single  peculiarity  of  means,  methods,  or  results 
easily  recognisable  as  radical.  That  is  to  say, 
the  definition  of  Economics  to  be  authoritative 
must  be  sought  by  deductive  rather  than  by 
inductive  processes,  which  have  hitherto  been 
the  only  ones  applied  to  the  problem.  The 
writer,  therefore,  in  his  attempt  to  define 
Economics,  proposes  to  commence  at  the  other 
end  and  to  seek  out  some  peculiarity  pertaining 
to  some  of  the  means,  methods,  or  results  of 
the  general  class  of  voluntary  human  actions, 
of  which  economic  actions  appear  to  be  a  sub- 
class, so  radical  and  fundamental,  that  the 
group  of  phenomena,  possessing  this  peculiarity, 
and  the  co-ordinate  groups  distinguished  from 
it  by  cognate  peculiarities,  will  each  necessarily 
have  more  in  common  than  can  be  obtained 
from  any  other  grouping. 

Third,  as  to  the  function  of  the  Entrepreneur, 
or,  as  the  writer  prefers  to  call  him,  the  En- 
terpriser, more  has  been  accomplished,  though 
the  development  of  the  conception  has,  until 
very  recently,  been  somewhat  sluggish.  Adam 
Smith,  as  was  quite  natural,  hardly  distinguishes 


lo      Enterprise  and  Production 

him  from  the  capitalist.  As  a  matter  of  fact  in 
his  time  both  functions  were  so  generally  exer- 
cised by  the  same  individual — the  cases  were 
so  rare  in  which  the  owner  of  capital  did  not 
employ  it  himself,  and  the  distinction  between 
the  two  functions,  radical  as  it  is,  was  yet  so 
unobtrusive  that  it  naturally  escaped  his  notice. 
Consequently  we  find  Adam  Smith  conjoining 
interest  and  profit  under  the  term  "  profits  of 
stock,"  which  he  seemed  to  regard  as  a  homo- 
geneous quantity,  or  so  nearly  homogeneous  that 
any  distinction  between  the  constituent  parts 
was  negligible.  And  in  this  he  was  followed, 
more  or  less  closely,  by  succeeding  thinkers, 
until  the  advent  of  the  younger  Mill ;  and  even 
Mill  accomplished  little  towards  the  explana- 
tion of  profit.  The  circumstances,  of  course, 
which  forced  economists  to  consider  and  study 
the  difference  between  the  capitalist  and  the 
entrepreneur,  were  the  creation  of  joint-stock 
companies,  and  the  enormous  development  of 
the  modern  system  of  credit,  from  which  a 
present  industrial  condition  has  arisen,  in  which 
a  great,  perhaps  the  greater,  part  of  capital  is 
not  employed  by  its  owners,  but  loaned  to 
others,  who  are  more  entrepreneurs  than  cap- 
italists, and  who  assume  the  responsibility  of 
its  use  or  employment.  Instances  to  be  sure 
are   extremely   rare   in   which   the    individual 


Present  Theoretical  Positions   1 1 

entrepreneur  is  not  also,  to  some  extent,  a 
capitalist,  but  there  are  so  many  cases  in  which 
the  entrepreneur  function  is  greatly  predomin- 
ant that  students  have  been  forced  to  consider 
wherein  the  two  functions  differ.  Without 
further  tracing  this  development,  it  may,  I 
think,  be  stated  that  the  following  are  the  pre- 
vailing conceptions  of  the  nature  of  profit,  and 
the  function  of  the  entrepreneur. 

Profit  is  acknowledged  to  be  a  peculiar  form 
of  income,  differing  essentially  from  rent,  wages, 
or  interest,  and  entitled  to  rank  with  them  as 
a  fundamental  form  of  equal,  but  only  equal, 
theoretic  importance.  It  is  also  identified  with 
the  "  residue  of  the  product,"  after  the  fixed 
claims  of  land,  labour,  and  capital  are  satisfied. 
And  it  is  looked  upon  as  the  income  peculiar 
to  the  entrepreneur,  who  is  regarded  as  '*the  co- 
ordinator of  land,  capital,  and  labour,  without 
furnishing  either  in  his  own  capacity."  Just 
what  is  to  be  considered  the  exact  content  of 
"  co-ordinator  "  in  this  connection  has  never,  so 
far  as  I  am  aware,  been  very  definitely  stated. 
Perhaps,  carefully  defined  and  limited,  it  would 
be  found  to  coincide  closely,  possibly  exactly, 
with  the  claim  of  the  writer  that  the  peculiar 
function  of  the  economic  entrepreneur  is  the 
assumption  of  responsibility  in  industrial  under- 
takings.   As  I  understand  the  phrase,  '*  to  co- 


12      Enterprise  and  Production 

ordinate "  is  to  establish  purposely  new  a.nd 
harmonious  relations.  It  is  to  make  such 
arrangements  as  are  expected  to  bring  about 
a  preconceived  and  desired  result.  Strictly 
speaking,  a  co-ordinator  is  not  only  the  one 
who  plans,  but  also  the  one  who  intelligently 
executes  a  plan,  and  the  two  may  be,  and 
usually  are,  different  persons.  The  executant, 
in  carrying  out  the  original  plan,  has  to  adjust 
details  and  this  involves  a  certain  amount  of 
subsidiary  planning  on  his  part,  but  his  func- 
tion in  the  economic  productive  process  is  uni- 
versally recognised  as  labour,  and  the  income 
obtained  by  him  as  wages.  Even  the  fact  that 
he  is  in  some  degree  held  responsible  for  the 
manner  in  which  he  executes  does  not  include 
any  element  of  economic  profit  in  his  income. 
If  he  is  an  especially  able  executant  of  the  par- 
ticular kind  of  work  he  is  engaged  for,  he  can 
indeed  command  higher  wages,  and,  considered 
from  his  own  individual  point  of  view,  the  dif- 
ference between  the  wages  he  commands  and 
the  wages  he  could  obtain  in  some  other  oc- 
cupation is  a  profit,  but  it  is  evidently  an  in- 
dividualistic and  not  an  economic  profit.  The 
recipient  of  salary  or  wages  will  indeed,  if  analy- 
tically inclined,  apportion  them  as  partly  the  re- 
ward of  his  physical  and  mental  exertion  and 
partly  as  due  to  his  choice  of  an  occupation,  but 


Present  Theoretical  Positions     13 

to  the  person  who  pays  wages  and  salaries  they 
are  predetermined  costs  and  contain  no  ele- 
ment of  profit.  Neither  is  the  originator  of  a 
plan,  afterwards  executed  in  accordance  with 
his  suggestion,  always  entitled  to  a  profit,  even 
when  he  is  the  executant  as  well  as  the  origina- 
tor. A  farm-hand  who  suggests  that  something 
be  done  on  the  farm  and  is  told  to  go  ahead  and 
do  it,  earns  wages  and  not  profit.  It  is  only  when 
the  co-ordinator  subjects  himself  to  the  result  of 
his  own  co-ordination,  or  of  the  co-ordination  of 
others,  that  he  becomes  the  recipient  of  profit. 
As  the  advocates  of  co-ordination  speak  of 
"  ownership "  as  necessarily  involved  in  the 
function  of  the  co-ordinator,  it  would  appear 
that  this  is  recognised  by  them,  but  they  seem 
unwilling  to  regard  the  responsibility  and  the 
risk,  inseparable  from  the  ownership  of  the  pro- 
duct, as  more  than  an  incident  and  insist  that 
the  responsibility  of  ownership  falls  upon  the 
entrepreneur  as  a  capitalist,  notwithstanding 
ownership  itself  being  a  function  of  the  former. 
I  cannot  think  such  a  use  of  the  term  legitimate, 
but  if  the  co-ordinator  should  be  exclusively 
defined  as  the  one  who  subjects  himself  to 
the  results  of  co-ordination,  the  person  at 
whose  risk  and  for  whose  benefit  co-ordination 
is  effected,  it  would  be  synonymous  with  the 
term  *'  enterpriser  "  as  I  have  employed  it. 


14      Enterprise  and  Production 

At  present,  however,  those  who  reject  the 
Risk  Theory  of  Profit,  and  insist  that  profit  is 
the  reward  of  co-ordination  and  not  of  the  as- 
sumption of  responsibility,  evidently  refuse  to 
define  co-ordination  in  any  such  reconciling 
sense,  for  while  acknowledging  that  "  owner- 
ship "  is  a  function  of  the  enterpriser  and  not 
of  the  capitalist,  they  yet  insist  that  the  re- 
sponsibility and  risk  of  ownership — that  is  its 
purpose  and  result — fall  upon  the  capitalist  and 
not  upon  the  entrepreneur.  Moreover,  what- 
ever additional  content  be  forced  into  it,  the 
term  is  inadmissible  because  the  connotation 
of  another  industrial  function,  that  of  labour, 
cannot  be  forced  out  of  it.  Whatever  else  it 
may  be,  an  accomplished  co-ordination  is  the 
direct  result  of  mental  labour  on  the  part  of 
the  one  who  planned  it,  and  of  physical  labour 
on  the  part  of  the  one  who  executed  the  plan. 
Both  are  co-ordinators,  whether  or  no  we  con- 
sider the  owner  of  the  product  a  co-ordinator 
also.  We  are  surely  barred  from  denying  the 
title  of  co-ordinator,  in  its  active  sense,  to  the 
one  who  co-ordinates  in  order  to  confer  it  ex- 
clusively with  a  passive  signification  upon  the 
one  who  is  co-ordinated  for.  And  even  if  this 
misuse  of  the  term  could  be  allowed  it  is  a 
faulty  one,  as  co-ordination,  or  bringing  things 
into    relation,  is    only  one    of   the  means   by 


Present  Theoretical  Positions    15 

which  the  ultimate  purpose  of  ownership  is 
accomplished.  The  real  question  in  dispute 
between  those  who  reject  the  Risk  Theory  of 
Profit  and  myself  is  whether  the  entrepreneur 
is  properly  distinguished  by  only  one  of  the 
several  means  he  adopts,  or  by  the  purpose  he 
has  in  view.  The  creation  of  a  product  re- 
quires that  the  things  to  be  brought  into 
new  relations  be  first  supplied  by  land  and 
capital,  and  the  use  of  land  and  capital  is  as 
essential  to  the  entrepreneur  as  the  labour 
force  which  can  co-ordinate  or  rearrange  them 
intelligently.  All  three  are  means  employed 
for  the  accomplishment  of  the  entrepreneur's 
purpose,  and  we  are  not  at  liberty,  therefore,  to 
select  the  employment  of  one  of  them  as  the 
distinguishing  peculiarity  of  this  function. 

I  am  not  aware  of  any  attempt  to  explain 
away  the  ambiguity  to  which  I  have  called 
attention,  or  other  contradictions  and  incon- 
sistencies to  which  attention  will  be  directed 
later.  Suffice  it  to  say  that  economists  gen- 
erally, in  the  words  of  one  of  them,  accept  co- 
ordination as  a  "  singularly  feHcitous  phrase," 
to  express  the  economic  function  of  the  en- 
trepreneur 


CHAPTER  II 
METHOD 

SOME  preliminary  observations  upon  method 
are  essential  to  the  proper  comprehension 
of  our  argument.  Not  that  I  have  much  to 
add  to  the  literature  of  the  subject  or  anything 
really  in  conflict  with  the  well  settled  opinions 
of  the  great  body  of  economic  writers  to  ad- 
vance, but  because  what  I  am  about  to  say  will 
explain  to  economists  the  mental  process  lead- 
ing to  my  conclusions  and  may  be  of  some 
assistance  to  such  of  my  readers  as  have  not 
made  a  special  study  of  method.  I  wish  more-' 
over  to  state  at  once  and  for  all  that  I  am  in 
entire  accordance  with  the  principles  of  what  is 
spoken  of  as  the  "orthodox  method*'  in  Eco- 
nomics, and  differ  only  from  the  common  usage 
of  the  great  body  of  economists  in  believing 
that  there  should  be  a  somewhat  fuller  and 
more  rigid  application  of  these  principles  than 
has  hitherto  been  attempted. 

It  is  of  course  understood  by  everybody  that 
i6 


Method  17 

the  "orthodox  method  "  is  deductive  ;  that  is, 
it  not  only  includes  deductive  processes — all 
reasoning,  inductive  as  well  as  deductive,  does 
that — but  it  relies  mainly  upon  them.  The 
question  between  the  advocates  of  the  two  com- 
plementary processes  is  only  as  to  emphasis  and 
order  of  arrangement.  In  the  last  analysis  both 
methods  are  simply  systems  of  classifying. 

A  definition  is  only  a  statement  of  the  class- 
mark  of  a  group — of  the  distinctive  peculiarity 
common  to  every  member  of  a  class — which 
segregates  the  individuals  of  that  class  in  a 
group  by  themselves,  distinguishing  them  from 
all  other  members  of  the  more  general  class 
or  genus  which  are  lacking  in  the  given  pecu- 
liarity. The  discovery  of  such  distinguishing 
peculiarities  is  the  object  of  both  inductive  and 
deductive  methods,  the  difference  being  that 
the  former  seeks  a  class-mark  primarily  by  ob- 
servation of  the  mass  of  phenomena  supposedly 
belonging  to  the  group  to  be  defined,  and  en- 
deavours to  verify  the  results  of  observation 
by  hypothesis  after  hypothesis  until  accord- 
ance with  objective  reality  is  obtained,  if  haply 
that  eventually  proves  practicable.  The  de- 
ductive process,  on  the  other  hand,  seeks  first 
a  conception  of  the  genus  that  must  include 
the  group  we  wish  to  define,  sufficiently  defin- 
ite to  enable  us  to  divine  the  nature  of  the 


1 8      Enterprise  and  Production 

various  differences  that  must  necessarily  arise 
between  the  individuals  composing  the  genus, 
or  at  least  the  more  important  of  these  differ- 
ences, and  then  selects  as  the  distinguishing 
mark  of  each  sub-class  the  special  difference 
which  appears,  from  the  nature  of  the  class  it- 
self, to  be  the  most  fundamental  to  the  special 
subject  of  investigation  in  hand.  Which  differ- 
ence is  the  most  fundamental  is  often  self- 
evident,  but  in  cases  of  doubt  one  principle  of 
division  after  another  is  tried  until  we  obtain 
results  not  only  in  accord  with  observed  facts 
but  also  which  explain  these  observed  facts. 
Thisis  simply  the  method  that  has  been  followed 
pretty  closely  by  all  orthodox  economists  in 
arranging  their  sub-classes,  that  is  in  formulat- 
ing subsidiary  distinctions,  but  they  do  not 
seem  to  have  trusted  their  usual  method  in  the 
formulation  of  the  basic  ideas  of  the  science. 
The  change  of  method  here  suggested  is  sim- 
ply the  extension  of  the  orthodox  method  to 
the  resolution  of  fundamentals. 

The  inductive  process  of  classification  is  evi- 
dently a  very  tedious,  laborious,  and  tentative 
proceeding  when  a  large  and  heterogeneous 
mass  of  phenomena  are  under  consideration. 
There  is,  however,  no  royal  road  to  learning 
and  it  is  by  this  process  alone,  difficult  as  it  is, 
that   the  first  steps  along  the  road  must  be 


Method  19 

taken.  Moreover  the  way  is  beset  with  pit- 
falls, as  apparent  resemblances  may  eventually 
turn  out  to  be  fanciful  or  fallacious,  or  with 
little  or  no  bearing  on  the  special  subject  in 
hand.  Both  on  these  accounts  and  because  an 
examination  of  particulars  can  never  be  ex- 
haustive the  unaided  inductive  process  can 
never  determine  positively  just  what  pheno- 
mena are  rightfully  included  in  any  given  class; 
neither  can  it  afford  us  any  decisive  test  as  to 
the  importance  of  any  peculiarity  it  has  de- 
tected. The  number  of  the  peculiarities  which 
can  serve  as  class-marks  is  almost  infinite,  and 
a  general  classification  based  upon  them  indis- 
criminately would  only  lead  to  confusion  worse 
confounded.  The  intelligent  organisation  of 
our  knowledge  can  only  be  founded  upon  a 
discrimination  among  peculiarities  which  the 
inductive  process,  that  is  observation  and  com- 
parison, cannot  itself  furnish.  Finally,  if  I 
should  succeed  in  demonstrating  the  existence 
of  a  clearly  demarcated  class,  a  simple  fact  is 
all  that  would  be  obtained.  But  an  unrelated 
fact  is  practically  worthless.  It  is  the  relations, 
especially  the  causal  relations,  between  facts, 
and  not  facts  themselves, that  constitute  know- 
ledge; and  it  is  the  organisation  of  such  rela- 
tions that  constitutes  a  science.  This  involves 
an    understanding   of    causes,   which    unaided 


20     Enterprise  and  Production 

induction  is  powerless  to  afford  us.  Because 
every  man  we  have  ever  known  or  heard  of  is 
mortal  is  not  the  reason  that  men  are  mortal. 
An  observed  fact  can  never  explain  itself.  As 
the  whole  process  of  induction,  as  commonly 
conducted,  involves  verification,  deduction  is 
also  included  so  far  as  it  serves  that  purpose. 
But  the  final  object  of  the  process  is  only  to 
prove  the  validity  of  the  induction.  In  the 
deductive  process  the  final  object  is  to  obtain 
the  deduced  result  as  a  necessary  consequence, 
and  in  this  process  the  only  province  of  induc- 
tion is  to  supply  the  premises  for  deduction. 

In  contradistinction  to  the  fallibility  of  the 
inductive  process  as  a  process,  deduction,  con- 
sidered simply  as  a  process,  is  infallible.  As  a 
matter  of  fact  there  is  nothing  that  in  itself 
is  quite  so  positive  as  deduction.  The  logical 
process  by  which  we  arrive  at  the  conclusion 
that  John  is  mortal  because  John  is  a  man  and 
all  men  are  mortal,  is  indisputable.  Given  the 
same  premises  similarly  conceived,  every  hu- 
man mind — the  weakest  as  well  as  the  ablest 
— must  arrive  at  identical  conclusions.  If  a 
deductive  conclusion  (not  a  mere  verbal  juggle) 
is  erroneous,  the  fault  is  never  in  the  deductive 
process  itself  but  in  the  premises  upon  which 
the  deduction  is  based.  But  these  premises  are, 
either  immediately  or  ultimately,  more  or  less 


Method  21 

clearly  conceived  observed  facts,  obtained  there- 
fore by  induction,  which,  when  analysed,  is 
only  observation  and  comparison  for  the  pur- 
pose of  detecting  resemblances  and  differences 
by  means  of  which  we  can  form  a  group  about 
which  certain  things  can  be  affirmed.  A  de- 
ductive result  can  therefore  be  hypothetical 
only  to  the  extent  in  which  the  inductions 
upon  which  it  is  founded  are  imperfect.  A  de- 
duction must  be  as  true  as,  and  can  be  no  truer 
than,  the  premises  upon  which  it  is  based.  To 
attain  indisputable  truth  by  its  means,  we  must 
start  from  unassailable  premises.  Deductive  re- 
sults so  derived  are  items  of  positive  knowledge, 
and  just  as  much  so  as  any  observed  fact 
whatsoever.  Are  such  unassailable  premises 
obtainable  for  the  fundamental  conceptions  of 
Economics  ? 

It  must  not  be  hastily  inferred  from  what 
has  been  said  that  we  have  arrived  at  a  verit- 
able impasse:  that  we  cannot  deduce  except 
from  premises  obtained  through  induction,  and 
that  we  cannot  make  inductions  that  are  not 
more  or  less  hypothetical,  and  that  therefore 
we  cannot  arrive  at  any  positive  deductive 
results.  Of  course  in  one  sense  this  is  true. 
As  we  cannot  rely  implicitly  even  on  the  evi- 
dence of  the  senses,  the  one  thing  we  can  be 
absolutely   sure   of    is   our  self-consciousness. 


22      Enterprise  and  Production 

But  the  existence  of  the  non-ego  and  the  gen- 
eral reliability  of  the  senses  once  posited,  our 
items  of  knowledge  concerning  the  non-ego 
can  have  varying  degrees  of  certainty,  which 
is  to  say  that  our  inductions  concerning  the 
nature  of  the  non-ego  can  vary  in  positiveness, 
and  such  of  those  inductions  about  whose  cor- 
rectness there  can  be  no  practical  doubt  we  are 
accustomed  to  regard  as  positive  knowledge — 
and  these  inductions  of  course  form  a  basis  for 
deduction  capable  of  yielding  equally  positive 
results. 

So  far  I  have  only  recapitulated  and  re- 
arranged what  has  been  said  by  others  on  the 
theory  of  method.  I  am  now  to  note  a  circum- 
stance which  so  far  as  I  am  aware  has  been 
overlooked — namely  that  the  reliability  of  our 
inductions,  or  in  other  words  the  accuracy  of 
our  observation,  varies  usually  at  least  with  the 
commonness  and  universality  of  the  observed 
class.  Or,  to  express  the  idea  in  more  conven- 
tional language,  the  wider  and  more  inclusive  a 
genus  the  more  readily  will  observation  detect 
its  existence  and  general  characteristics.  Thus 
the  broad  distinction  between  the  animal  and 
vegetable  kingdoms,  as  they  are  each  a  wide 
and  inclusive  genus,  was  so  open  to  observa- 
tion that  the  induction  that  classified  them  was 
made  before  the  dawn  of  history,  but  the  sub- 


Method  23 

divfsion  of  these  genera  into  species  is  hardly 
yet  fully  accomplished,  and  the  further  sub- 
division of  species  into  varieties  is  yet  more 
unsettled.  It  is  true  to  be  sure  that  the  line 
of  demarcation  between  animals  and  plants  is 
not  yet  wholly  determined,  as  organisms  ex- 
ist which  cannot  be  positively  affirmed  to  be 
animals  or  yet  plants,  though  we  can  assert 
them  to  be  either  one  or  the  other  or  the 
connecting  link  between,  or,  in  other  words,  to 
belong  to  the  yet  wider  and  therefore  more 
clearly  apprehended  genus  of  living  things. 
Absolute  certainty  as  to  just  what  individuals 
are  included  in  a  class  cannot,  of  course,  be 
obtained  inductively,  but  the  existence  and  gen- 
eral character  of  a  class  can  be  positively  estab- 
lished by  observation,  and  that  is  sufficient  as  a 
foundation  for  theory,  though  not  perhaps  al- 
ways sufficient  for  its  practical  application  in  a 
few  extreme  cases.  Such  genera  as  the  uni- 
verse, the  sidereal  system,  living  matter,  the 
animal,  vegetable,  and  mineral  kingdoms  may 
be  positively  regarded  as  indisputably  estab- 
lished by  induction,  and  deductions  based  upon 
them  as  major  premises,  and  upon  other  equally 
indisputable  genera  as  minor  premises,  are  mat- 
ters of  equally  positive  knowledge.  When- 
ever our  deductive  results  lack  positiveness, 
that  is  when  they  are  founded  on  more  or  less 


24      Enterprise  and  Production 

hypothetical  premises,  it  is  often  because  we 
have  not  gone  back  far  enough  for  the  genus 
dependent  wholly  upon  observation.  There- 
fore, what  I  shall  endeavour  to  do  is  to  go  back 
two  steps  farther  than  others  have  done  for  the 
inductive  result,  upon  which  economic  deduc- 
tion is  to  be  primarily  based.  The  inductively 
obtained  conceptions  which  economists  have 
hitherto  utilised  as  their  original  bases  for  de- 
duction are  the  four  productive  factors,  which 
they  have  distinguished  from  each  other  wholly 
by  observation.  Unfortunately  the  distinc- 
tions between  them  are  not  obvious  enough  to 
be  precisely  and  indisputably  obtained  by  ob- 
servation, and  consequently  different  individ- 
uals have  somewhat  different  conceptions  of 
these  factors  and  their  functions,  and  we  have 
no  authoritative  test  for  deciding  between 
these  varying  concepts.  These  variations  are 
not  perhaps  sufficiently  serious  to  invalidate 
many  economic  results,  though,  as  we  shall  see 
later,  they  are  much  more  radical  than  would 
naturally  be  imagined.  The  trouble  is  that 
economic  teachings  must  lack  authority  so  long 
as  the  fundamental  assumptions  of  the  science 
are  at  all  dubious,  and  that  even  the  best  eco- 
nomists are  far  from  any  agreement  among 
themselves  as  to  fundamental  concepts  is  evi- 
dent enough  from  nearly  all  discussions  of  eco- 


Method  25 

nomic  theory  being  so  heavily  encumbered 
by  laborious  statements  of  the  author's  con- 
ceptions of  the  terms  employed,  and  by  each 
writer  pointing  out  the  differences  between  his 
conceptions  and  those  held  by  his  opponents. 
What  I  shall  attempt  is  to  arrive  at  conceptions 
of  the  economic  functions  by  means  of  deduc- 
tions based  upon  a  definition  of  the  scope  of 
the  science,  deduced  in  its  turn  from  the  in- 
ductively established  genus  of  which  economic 
activities  are  a  sub-group.  And  I  believe  that 
I  have  gone  far  enough  back  to  entitle  me  to 
claim  that  my  definition  of  the  science  and  my 
concepts  of  the  four  productive  functions  are 
positive  and  authoritative ;  that  is,  that  there 
is  a  logical  necessity  for  accepting  them,  and  if  so 
that  they  are  as  positively  established  as  any  fact 
of  the  Natural  Sciences,  and  all  excuse  for  dis- 
putants differing  as  to  the  exact  content  of 
these  terms  is  destroyed. 

Of  course,  quite  the  same  degree  of  positive- 
ness  cannot  be  claimed  for  the  subsidiary  dis- 
tinctions of  the  science  or  for  the  practical 
application  of  economic  theories.  As  we  pro- 
ceed in  the  development  of  the  science,  we 
have  to  rely  more  and  more  for  our  minor 
premises  upon  narrower  genera  not  so  securely 
established  by  observation,  but  it  will  be  ap- 
parent, I  hope  and  believe,  that  these  second- 


26      Enterprise  and  Production 

ary  inductions  will  gain  greatly  in  probability 
from  the  final  determination  of  the  major  pre- 
mises to  which  they  are  applied. 

The  idea  seems  to  be  so  deeply  rooted  that 
Economics  is  discredited  by  its  method,  that, 
although  needless  for  economists,  a  few  obser- 
vations for  the  benefit  of  my  non-economic 
readers  may  be  allowable  to  show  why  it  is 
that,  while  the  inductive  method  is  natural  to 
and  the  only  proper  one  for  the  Natural  Sci- 
ences, the  deductive  is  the  one  almost  exclu- 
sively adopted  by  students  of  economic  theory 
and  of  the  Moral  Sciences  in  general.  Some 
decades  ago  the  Historical  School  entered  its 
protest  against  deductive  methods  in  Economics 
and  obtained  disciples,  considerable  both  in 
number  and  ability.  Though  this  protest  was 
beneficial  in  calling  attention  to  the  danger  of 
reasoning  from  poorly  established  premises,  and 
though  the  labours  of  historical  students  have 
not  been  wholly  fruitless  in  matters  of  verifica- 
tion and  practical  application,  they  have  con- 
tributed absolutely  nothing,  so  far  as  I  am 
aware,  to  the  positive  establishment  of  economic 
theory,  and  their  protest  against  the  orthodox 
method  has  gradually  died  away  until  only  a 
few  echoes  of  it  are  left.  And  we  are  now,  I 
think,  in  a  position  to  understand  why.  It  is 
not  that  the  inductive  method  to  which  they 


Method  27 

would  restrict  the  moral  as  well  as  the  physical 
sciences  is  a  faulty  one,  but  because  it  is  not 
so  applicable  to  the  former  as  to  the  latter. 
Theoretically  it  is  perfectly  possible  to  detect 
the  class-mark  of  a  class  by  means  of  observa- 
tion and  verification  alone,  but  the  difficulties 
are  practically  insuperable  to  finite  minds  ex- 
cept for  such  widely  inclusive  genera  as  I 
have  called  attention  to.  Moreover,  when,  as 
is  conceivably  sometimes  the  case,  a  sub-class 
in  any  of  the  Moral  Sciences  could  be  deter- 
mined either  way,  the  deductive  method  should 
be  given  the  preference  for  two  reasons.  It  is 
more  authoritative  because  founded  on  a  more 
indisputable  induction,  and  it  affords  us  an 
additional  and  different  kind  of  knowledge — 
namely,  a  perception  of  the  operating  cause. 
Induction  establishes  a  fact;  deduction  dis- 
closes the  reason  as  well.  The  discovery  of  a 
physical  fact  leads  us  indeed  to  seek  its  cause, 
but  when  found  the  cause  is  simply  the  first 
term  of  a  sequence.  Why  it  is  inevitable  we 
can  never  know.  The  Natural  Sciences  are 
concerned  with  the  Non-ego  ;  the  Moral  Sciences 
with  the  Ego — with  volition,  which  is  an  active 
cause,  in  an  entirely  different  sense  from  mere 
sequence.  Not  only  are  the  Natural  Sciences 
able  to  avail  themselves  of  experiment  and 
isolation  for  purposes  of  verification,  but  the 


28      Enterprise  and  Production 

sequences  they  establish  are  invariable,  because 
the  forces  to  which  change  is  due  are  also  in- 
variable in  character.  In  the  Moral  Sciences, 
on  the  other  hand,  experiment  and  isolation 
are  so  difficult  as  to  be  impracticable,  and  they 
would  not  be  decisive  if  they  were  practical, 
because  the  cause  of  moral  actions  is  volition, 
which  is  not  only  dependent  upon  perception 
but  is  a  more  or  less  variable  quantity,  as  the 
force  and  character  of  motives  change  as  ethical, 
social,  and  economic  development  occurs.  We 
cannot  be  sure,  for  instance,  that  laws  enacted 
in  Greece  or  Rome  would  produce  the  same  or 
even  very  similar  results  in  America  or  Eng- 
land, whereas  chemical  reactions  are  not  only 
immediate  and  automatic  but  always  and 
everywhere  the  same.  Customs  which  enrich 
one  nation  might  impoverish  another.  We  are 
unable  therefore  to  make  any  certain  induc- 
tions from  the  past  experiences  of  the  race. 
All  that  the  Moral  Sciences  can  yield  us  is  a 
knowledge  of  the  tendencies  of  human  nature, 
as  we  know  it,  under  given  circumstances.  We 
can,  I  think,  have  as  positive  a  knowledge  of 
the  existence,  character,  and  direction  of  these 
tendencies  as  we  can  acquire  of  physical 
sequences,  but  we  cannot  measure  them  quan- 
titatively and  cannot  therefore  predict  their 
resultant  except  in  a  very  general  way.    Never- 


Method  29 

theless  the  moral  law  back  of  these  tendencies 
is  as  immutable  as  the  physical  principles  re- 
sponsible for  such  sequences  as  we  discover  by 
induction.  What  men  would  naturally  do  in 
any  given  circumstances  never  changes,  but 
what  they  will  do  and  how  soon  they  will  do  it 
is  another  question.  Both  are  questions  of 
primary  importance  to  any  scheme  of  better- 
ment, whereas  the  inductive  results  of  the 
Natural  Sciences,  beyond  the  satisfaction  of 
our  curiosity,  are  only  of  moment  to  the  race 
because  of  their  influence  as  environment  upon 
our  volitional  tendencies. 

All  this  is  well  understood  by  economists 
but  does  not  seem  to  be  so  well  understood  by 
those  whose  attention  has  not  been  called  to 
the  subject  of  logical  method,  and  among  them 
a  tendency  certainly  exists  to  discredit  and 
neglect  the  Moral  Sciences,  and  especially  the 
teachings  of  Economics,  because  of  the  sup- 
posed inferiority  of  the  method  necessarily 
employed.  And  it  certainly  will  do  no  harm 
to  remind  this  class  that  all  it  concerns  man- 
kind to  know  and  understand  can  only  be 
acquired  as  a  result  of  deduction,  and  that 
items  of  knowledge  inductively  obtained  are 
only  of  value  on  account  of  the  deductions 
which  can  be  based  upon  them.  Be  all  this  as 
it  may.   Economics  will   certainly  gain  in  au- 


30      Enterprise  and  Production 

thority  when  its  fundamental  terms  are  more 
positively  established,  and  it  seems  to  the  writer 
that  the  only  hope  of  establishing  them  on 
firmer  foundations  lies  in  the  extension  of  the 
recognised  or  "  orthodox  "  method  of  the  sci- 
ence to  their  resolution,  and  that  any  taint  of 
scholasticism  and  hypothesis  rightly  chargeable 
against  economic  theory  is  due  not  to  the 
orthodox  method  being  mainly  deductive,  but 
to  its  not  being  deductive  enough,  or  perhaps 
I  had  better  say,  from  too  early  a  demand  on 
induction  for  its  premises. 

When  the  man  of  general  culture  seeking  that 
modicum  of  knowledge  of  Economics  that  no 
gentleman's  cranium  should  be  without,  takes 
up  a  treatise  on  the  subject  he  finds  that  it  treats 
of  the  relationsof  landlords,  capitalists,  labourers, 
and  entrepreneurs,  and  of  the  four  different  kinds 
of  revenue — rent,  interest,  wages,  and  profit — 
obtained  by  the  four  industrial  factors.  These 
are  all  terms  of  common  speech  and  our  student 
supposes  that  he  understands  about  what  is 
meant  by  each  one  of  them.  He  shortly  dis- 
covers, however,  that  his  author  employs  these 
terms  in  a  different  and  more  precise  significa- 
tion than  he  has  been  accustomed  to  attach  to 
them.  He  soon  realises  that  his  own  ideas  of 
them  are  hazy  and  indefinite  and  unfit  for  logical 
use.    He  either  gets  all  jumbled  up  and  remains 


Method  31 

so  for  the  rest  of  his  life,  or  he  sets  to  work  to 
re-form  his  previous  conceptions  so  as  to  bring 
them  into  accord  with  those  of  the  author.  He 
finds  this  pretty  hard  work,  because,  although 
his  author's  conceptions  are  far  more  complete 
and  precise  than  his  own,  they  differ  from  his 
own  in  this  respect  only  in  degree.  His  previous 
use  of  the  terms  was  founded  upon  the  various 
meanings  he  and  others  apparently  attached  to 
them  in  conversation,  in  which  of  course  they 
had  been  very  loosely  employed.  His  author 
has  indeed  gone  beyond  this.  The  attempt  to 
use  the  terms  logically  in  deductive  argument 
has  disclosed  many  ambiguities  and  some  con- 
tradictions in  their  popular  use,  which  he  has 
endeavoured  to  avoid  and  reconcile  in  his  own 
employment  of  the  terms.  This  attempt  has 
met  with  a  certain  degree  of  success,  and  resulted 
in  concepts  much  more  accurate  and  precise  than 
the  popular  haphazard  usage.  Nevertheless 
they  differ  from  the  popular  conceptions  only 
in  degree  and  not  in  kind.  Like  them  they  are 
wholly  founded  upon  observation,  a  wider  and 
more  careful  observation  to  be  sure,  but  by  ex- 
actly the  same  logical  process.  There  is,  how- 
ever, a  certain  sort  of  verification  of  the  results  of 
this  observation  in  that  the  new  conceptions 
are  less  ambiguous  and  better  fitted  for  logi- 
cal use,   but   such   verification  is  not  absolute 


32      Enterprise  and  Production 

enough  to  endow  the  scientific  usage  with 
authority. 

Having  mastered  his  first  author  and  looking 
at  economic  phenomena  through  his  eyes,  our 
student  now  takes  up  another  author  of  equal 
repute  and  finds  him  using  these  fundamental 
terms  in  somewhat  different  significations,  which 
lead  him  of  course  to  different  conclusions.  Our 
perplexed  student  learns  that  his  two  authors 
have  discussed  some  of  the  points  of  difference 
between  them,  and  finds  that  the  controversy 
consists  mainly  in  an  attack  of  each  on  the 
fundamental  conceptions  of  the  other  and  a 
defence  of  his  own.  Further  research  reveals 
that  there  is  a  third  and  a  fourth,  or  perhaps  a 
dozen  other  economists,  who  differ,  at  least 
slightly,  in  their  fundamental  conceptions,  not 
only  from  the  first  two,  but  also  from  each  other. 

For  a  certain  order  of  keenly  intellectual  and 
able  minds  the  situation  has  its  charms,  and  they 
become  specialists — a  tribe  of  intellectual  fox- 
hunters  to  whom  the  glory  of  the  chase  is  every- 
thing and  the  fox  itself  nothing.  But  it  is  at 
this  point  that  the  man  of  general  culture  gives 
up  in  disgust  and  despair.  He  feels  indeed  a 
great  respect  and  admiration  for  those  who  keep 
on  in  the  pursuit  of  "logic  for  logic's  sake,'" 
but  he  refuses  to  accept  their  guidance  in  the 
practical  application    of    economic  principles. 


Method  33 

Now  why  does  not  the  ordinary  man,  instead  of 
stopping  at  this  point,  go  on  to  discover  and 
determine  which  of  his  teachers  is  correct  ?  The 
reason  is  that  there  is  no  common  ground  of 
appeal.  Each  disputant  asks  us  to  accept  his 
concept  because  it  is  the  most  reasonable,  that 
is  the  most  reasonable  to  him,  and  he  strives  to 
make  us  see  the  phenomena  through  his  eyes. 
He  asks  us  to  observe  what  he  has  observed,  to 
make  the  same  inductions  that  he  has  made. 
But  this  is  something  which  personality  forbids. 
We  can  indeed  see  what  another  points  out,  but 
we  see  it  with  our  own  eyes  and  not  his,  and 
consequently  a  little  differently.  And  even  if 
we  should  see  with  his  eyes  how  can  we  be  sure 
that  his  are  the  "  all-seeing  **  ones  ?  The  finite 
can  reach  only  a  varying  degree  of  certainty  by 
observation  and  induction.  The  advantage  in 
positiveness  which  deduction  has  over  it  is  that 
it  can  select  the  most  certain  results  of  observa- 
tion as  a  basis  for  its  own  infallible  processes. 

To  return  to  our  dozen  disputants,  we  cannot 
select  the  conception  of  any  one  of  them  as 
undoubtedly  true  because  it  appears  to  him  to 
be  pointed  to  by  his  general  observations,  even 
if  our  own  observation  agrees  with  his.  But  if 
one  of  the  disputants  comes  forward  with  a  con- 
ception which  he  does  not  ask  us  to  accept  as 
his,  but  because  it  is  a  necessary  consequence 
3 


34       Enterprise  and  Production 

of  two  observed  circumstances  on  the  reality 
and  accuracy  of  which  all  observers  agree,  we 
cannot  withhold  our  acquiescence  if  we  would, 
once  we  have  fully  comprehended  the  two 
circumstances.  Major  and  minor  premises  ad- 
mitted, the  conception  in  question  follows  as  a 
matter  of  course.  When  economists  define 
their  fundamental  terms  in  this  manner,  the  man 
of  general  culture  and  the  leaders  in  practical 
affairs  will  become  their  allies  and  coadjutors, 
but  not  before.  The  fact  that  the  comparison 
of  observations  and  the  conflict  of  opinions  has 
resulted  in  a  growing  consensus  of  concept  is 
not  enough,  for  it  can  never  bring  about  such 
a  practical  identity  of  conception  as  will  be 
authoritative. 


CHAPTER  III 

PRINCIPLES    APPLICABLE    TO     DEDUCTIVE 
CLASSIFICATION 

DEFINITION  is  merely  the  formulation  of 
the  distinguishing  peculiarity  of  a  class. 
An  economic  term  is  simply  the  name  given  to 
a  group  of  economic  phenomena  that  are  alike  in 
a  certain  selected  particular ;  and  the  usefulness 
and  acceptability  of  the  term  depend  upon  the 
wisdom  with  which  the  selection  of  the  distin- 
guishing particular  is  made. 

Any  peculiarity  can  serve  as  a  basis  for 
grouping  individuals  in  classes  by  themselves, 
because  a  common  characteristic  subjects  all 
individuals  possessing  it  to  some  similar  in- 
fluence; but,  unless  the  selected  point  of 
resemblance  is  germane  to  the  subject  under 
investigation,  the  resulting  grouping  will  give 
no  valuable  information  on  that  special  sub- 
ject, though  it  may  not  be  useless  for  other 
purposes.  Thus  the  grouping  of  animals  by 
their  colour  might  help  to  explain  how  certain 
35 


36      Enterprise  and  Production 

animal  secretions  were  affected  by  climate  and 
habitat ;  but  it  could  hardly  afford  any  explan- 
ation of  the  evolution  of  species.  But  even 
when  the  point  of  resemblance  is  entirely  ger- 
mane to  the  general  subject  in  hand,  it  cannot 
always  be  selected  as  the  fit  class-mark  of  the 
group  we  desire  to  segregate.  The  peculiarity, 
even  when  confined  to  members  of  the  group, 
may  not  extend  to  all  of  them,  which  is  to  say 
that  it  is  the  class-mark  of  a  sub-group.  And 
when  it  does  pertain  to  all  of  the  members  of 
the  group,  it  may  be  only  attendant  upon,  or 
the  consequence  of,  another  more  vital  pecu- 
liarity, which  is  the  real  class-mark  of  the 
group  in  question.  And  again,  any  mass  of 
phenomena  may  be  divided  into  an  almost 
infinite  variety  of  groups  or  sub-groups,  only 
one  of  which  system  of  groupings  will  be  found 
adequate  for  a  specific  purpose.  The  chief 
difficulty  therefore  of  attaining  that  orderly 
arrangement  of  our  knowledge  which  makes  it 
a  science,  lies  in  the  selection  of  the  distin- 
guishing peculiarities  in  accordance  with  which 
the  items  of  our  knowledge  must  be  grouped  to 
bring  out  their  inter-relations  most  plainly. 

Evidently  we  have  here  an  almost  hopeless 
task,  unless  we  can  discover  and  utilise  some 
general  principles,  that  can  serve  as  guides  to 
the   selection    of   the   proper  peculiarities   to 


Deductive  Classification        37 

efifect  the  particular  grouping,  which  alone  can 
place  the  included  phenomena  in  their  really- 
vital  relations  to  the  environment  and  to  each 
other.  So  long  as  we  are  forced  to  depend 
wholly  or  mainly  upon  our  intuitive  concep- 
tions as  our  guides,  we  can  never  arrive  at 
positive  conclusions,  although  these  intuitive 
conceptions  may  be  near  enough  to  the  truth 
to  afford  us  considerable  insight  into  the 
relations  which  really  exist — an  insight,  how- 
ever, necessarily  more  or  less  distorted,  unless, 
which  can  very  rarely  be  the  case  in  the 
Moral  Sciences,  our  intuitions  happen  to  be 
verifiable  as  exactly  correct.  In  the  Natural 
Sciences  the  validity  of  our  preconceptions  or 
surmises  can  be  tested  by  the  process  of  isola- 
tion and  experiment,  but  even  in  these  sciences 
our  progress  is  greatly  accelerated  by  the  dis- 
covery of  any  general  law  that  can  serve  as  a 
premise  for  deduction.  Thus  the  insight  into 
the  phenomena  of  nature  recently  acquired  by 
deductive  processes,  based  upon  the  law  of 
evolution,  is  of  greater  account  than  the  in- 
ductive contribution  of  several  preceding  cen- 
turies, during  which  this  premise  for  deduction 
was  lacking.  And  the  real  reason  that  recent 
progress  has  been  so  rapid  is  the  guidance 
afforded  by  this  principle  in  the  selection  of 
the  fundamental  peculiarities  which  alone  are 


38      Enterprise  and  Production 

competent  to  serve  as  the  basis  for  a  really 
scientific  classification. 

Now  by  whatever  process  definitions  are 
arrived  at,  those  who  criticise  them  usually 
base  their  objections  upon  the  assertion  that 
the  resulting  grouping  is  not  that  which  brings 
out  most  clearly  the  inter-relations  which  are 
essentially  under  consideration.  And  to  back 
up  their  preference  for  one  grouping  over  an- 
other they  are  accustomed  to  appeal,  at  least 
by  inference,  to  this  or  that  principle  of  classi- 
fication. It  would  seem  therefore  that  the 
only  method  by  means  of  which  a  selection 
can  be  made  between  two  or  more  proposed 
definitions,  with  somewhat  different  contents 
but  intended  to  formulate  the  same  idea,  is  by 
the  application  of  these  principles.  I  am  not 
aware,  however,  of  any  systematic  treatise  on 
the  principles  of  classification  as  especially 
applicable  to  the  deductive  method,  and  I  will 
therefore  venture  to  call  attention  to  some  of 
the  more  important  of  them. 

The  principles  of  deductive  classification 
which  it  seems  to  me  should  govern  the  defini- 
tion and  use  of  economic  terms,  though  often 
neglected,  are  by  no  means  novel  or  unrecog- 
nised. Whatever  merit  this  presentation  of 
them  may  be  judged  to  possess  is  to  be  found 
in  their  assemblage,  and  in  the  recognition  of 


Deductive  Classification         39 

their  obligatory  character.  The  reason  that 
they  have  not  received  the  attention  they  de- 
serve and  have  not  exerted  the  influence  they 
should  over  the  development  of  economic 
thought,  is,  I  think,  to  be  found  in  two  circum- 
stances, which  are  that  some  of  them  apply 
only  to  the  deductive  and  not  to  the  inductive 
methods  of  ascertaining  group  formation,  and 
others  of  them  are  inapplicable  even  to  deduc- 
tive methods  before  the  definition  of  the  gen- 
eral class — that  is  in  Economics  the  science 
itself — is  satisfactorily  formulated.  Manifestly, 
the  reason  economists  have  never  attempted 
any  authoritative  determination  of  their  funda- 
mental concepts  is  because  they  have  looked 
upon  such  determination  as  the  final  goal  of 
the  science,  only  obtainable  inductively  through 
synthesis  and  undeterminable  deductively  by 
analysis. 

Inductive  classification,  in  its  procedure  from 
the  particular  to  the  general,  can  logically  deter- 
mine the  sub-classes  first  and  trust  later  investi- 
gation for  finally  accomplishing  the  synthesis 
which  binds  the  sub-classes  together  ;  but  even 
in  this  process  the  determination  of  the  sub- 
groups is  more  or  less  aided  by  intuitive  per- 
ceptions of  what  the  general  class  probably  is. 
When,  however,  we  possess  this  knowledge,  we 
are  not  confined  to  the  inductive  process  to 


40      Enterprise  and  Production 

obtain  our  sub-groups — that  is  to  say,  instead  of 
observing  and  comparing  individuals  in  the 
hope  of  detecting  resemblances  or  differences 
by  which  they  can  be  divided  into  groups,  we 
can  examine  into  the  nature  of  the  general 
class  itself  to  find  out  in  what  ways  the  individ- 
uals composing  it  must,  in  the  nature  of 
things,  differ  among  themselves;  and  select 
that  one  of  those  ways  as  the  principle  of 
division,  which  most  clearly  segregates  the 
particular  sub-group  we  wish  to  study. 

Therefore  the  first  essential  in  deductive 
classification  is  a  sufficient  conception  of  the 
general  class  to  which  the  group  we  wish  to 
define  belongs.  Of  course  a  complete  know- 
ledge of  the  general  class  connotes  as  complete 
a  knowledge  of  the  sub-groups  into  which  it 
can  be  divided,  and  if  an  absolutely  complete 
comprehension  of  the  general  class  is  an  essen- 
tial to  its  use  as  a  major  premise  in  de- 
ductive classification,  the  deductive  process 
becomes  possible  only  when  it  is  no  longer  of 
use.  Fortunately  this  fulness  of  knowledge  is 
by  no  means  essential  to  positive  results.  All 
we  need  to  be  sure  of  is  a  sufficiently  definite 
conception  of  the  general  class  to  enable  us  to 
detect  the  really  radical  differences  between  the 
individuals  composing  it.  As  we  have  already 
had  occasion  to  observe,  the  wider  and  more 


Deductive  Classification         41 

inclusive  the  class,  the  easier  it  is  to  obtain  this 
sufficient  conception  inductively.  Such  widely 
general  classes  as  the  universe,  our  own  plane- 
tary system,  the  earth,  the  mineral  kingdom, 
and  mankind  are  all  positively  known  to  us  to 
exist,  and  are  precisely  enough  conceived  to  be 
safely  employed  as  bases  for  a  positive  demarca- 
tion of  the  included  sub-groups,  as  can  also  a 
great  many  other  classes,  narrow  indeed  as  com- 
pared with  the  above,  but  wide  as  compared 
with  classes  too  unobtrusive  for  their  class-mark 
to  be  readily  detected.  The  first  step  then  of 
deductive  classification  is  the  determination 
of  the  general  class  which  must  include  the 
sub-classes  we  are  trying  to  define.  This  es- 
tablished, we  have  a  major  premise,  and  the 
want  of  positiveness  of  any  deduction  based 
upon  it  will  be  wholly  due  to  some  lack  of 
positiveness  in  the  minor  premises  employed. 

The  second  principle  of  deductive  classifica- 
tion, by  which  we  seek  our  minor  premises,  is 
the  obligation  of  searching  out  and  selecting 
peculiarities,  which  in  the  nature  of  things  are 
necessarily  possessed  by  only  a  part  of  the  in- 
dividuals composing  the  general  class.  Such  a 
peculiarity  becomes  the  class-mark  of  the  group 
of  individuals  possessing  it,  and  its  negative  or 
opposite  the  class-mark  of  the  groups  not  pos- 
sessing it.   When,  however,  the  peculiarity  is  one 


42      Enterprise  and  Production 

of  a  number  of  co-efficient  peculiarities,  we  have 
necessarily  more  than  two  sub-groups.  Thus  if 
we  are  dividing  the  general  class  "  houses  "  into 
groups  according  to  the  number  of  stories  in 
each,  we  would  have  one-story,  two-story,  three- 
story  groups  of  houses  up  to  the  twenty-five 
story  sky-scraper. 

Now  amid  the  innumerable  differentiations 
in  accordance  with  which  a  general  class  can  be 
subdivided,  there  can  be  only  one  capable  of 
segregating  and  explaining  the  particular  group 
we  are  desirous  of  investigating.  This  difference 
is  commonly  and  correctly,  spoken  of  as  the 
fundamental  one,  and  the  next  step  in  deductive 
classification,  after  we  have  obtained  our  general 
class,  is  the  discovery  of  this  fundamental  dis- 
tinction. In  the  Natural  Sciences  this  may 
be  a  matter  of  considerable,  and  in  some  cases 
insuperable,  difficulty,  for  in  them  we  have  to 
do.  with  sequence  merely,  that  is  with  forces 
that  are  known  to  us  only  by  their  manifesta- 
tions in  sequence,  and  we  can  never  get  behind 
these  sequences  to  understand  why  they  are 
inevitable — their  purpose  and  active  cause  is 
beyond  our  ken.  We  have,  therefore,  to  rely 
wholly  on  observation  for  our  knowledge  of  the 
first  term  of  a  sequence.  How  the  character  of 
this  first  term  will  manifest  itself  in  new  relations 
is  at  the  best  only  an  inference.     In  the  Moral 


Deductive  Classification         43 

Sciences  however  we  are  always  dealing  with 
purpose — an  immediately  known  active  cause — 
and  our  fundamental  difference  must  always  be 
a  distinction  between  motives;  that  is,  a  differ- 
ence which  affects  motive.  These  differences 
can  be  only  of  three  kinds,  namely  :  differences 
in  the  character  of  the  ends  to  be  attained, 
differences  in  the  means  for  accomplishing  ends, 
and  differences  in  the  method  adopted  to  secure 
desired  ends.  This  fact  greatly  simplifies  the 
search  for  fundamental  distinctions,  as  we  can 
usually  discern  without  much  effort  which  is 
the  kind  of  difference  suitable  for  the  purpose 
in  hand.  This  greatly  narrows  the  field  over 
which  we  have  to  search  for  the  distinguishing 
pecuHarity  or  co-efficient  peculiarities  funda- 
mental to  any  investigation  we  are  engaged  in. 
In  this  search,  so  confined,  we  are  moreover 
greatly  aided  by  our  intuitive  perceptions  of 
what  distinctions  in  the  nature  of  things  must 
be  most  radical — must  go  to  the  root  of  the 
matter.  We  at  once  recognise  some  peculiarities 
as  incapable  by  their  very  nature  of  exercising 
much  influence,  while  others  are  as  quickly 
recognised  as  necessarily  producing  important 
results — thus  whether  a  moral  agent  acts  for 
himself  or  in  the  interest  of  another  cannot  but 
lead  to  a  great  diversity  in  his  actions,  and  this 
difference  is  the  distinguishing  peculiarity  be- 


44      Enterprise  and  Production 

tween  egoism  and  altruism,  two  terms  that  are 
sufficiently  defined  by  their  names,  and  that  are 
as  positively  established  as  any  fact  of  the 
Natural  Sciences,  whereas  moral  peculiarities, 
dependent  on  environment,  while  interesting, 
cannot  be  fundamental.  There  may,  to  be  sure, 
be  two  or  more  differentiations  between  the 
members  of  any  general  class  which  are  impor- 
tant, and  each  of  these  may  be  fundamental  for 
a  separate  purpose,  and  it  may  not  be  quite  plain 
in  all  cases  which  one  of  these  is  the  fundamental 
one  for  the  special  purpose  in  hand.  But  it 
rarely  occurs  that  we  have  many  at  all  suitable 
principles  of  division  to  choose  from,  or  that  we 
have  long  to  puzzle  over  our  selection,  for  usu- 
ally a  very  superficial  verification  is  sufficient  to 
rectify  our  choice.  It  is  at  this  point  that  de- 
ductive classification  in  the  moral  sciences  gives 
evidence  of  its  superiority  over  the  inductive. 
The  verificationsof  the  fundamental  distinctions 
by  the  latter  must  include  some  examination  of 
every  individual  possibly  embraced  by  the  defin- 
ition, because  we  are  reasoning  from  the  par- 
ticular to  the  general  and  the  general  cannot  be 
surely  established,  unless  we  have  made  it  cer- 
tain that  all  particulars,  possibly  included  in  it, 
agree  in  the  point  of  resemblance  we  are  endeav- 
ouring to  establish.  When  on  the  other  hand 
we  are  engaged  in  deductive  definition  we  have 


Deductive  Classification         45 

a  true  sub-class  the  moment  we  have  detected  a 
peculiarity,  possessed  by  some  members  of  the 
general  class  and  not  possessed  by  others,  be- 
cause the  possession  of  the  peculiarity  subjects 
its  possessors  to  similar  influences.  All  that  we 
have  to  determine  further  is  whether  any  such 
sub-class  is  the  one  required  for  the  purpose  in 
hand,  a  comparatively  easy  matter,  though  by 
no  means  free  from  all  difHculty.  Just  what  in- 
dividuals are  included  in  the  sub-class  is  a  matter 
of  indifference,  except  as  it  helps  us  to  de- 
termine whether  the  sub-class  possessing  the 
selected  peculiarity  is  the  sub-class  needed  for 
our  especial  purpose,  and  in  almost  all  cases 
this  can  be  positively  determined  by  an  examin- 
ation of  individuals  comparatively  incomplete. 
And  when  as  will  often,  indeed  usually,  happen 
examination  discovers  certain  individuals  to  be 
excluded  from  the  class  that  our  preconceptions 
had  included,  we  are  entitled  to  claim  that  our 
preconceptions  are  erroneous,  and  that  these 
individuals  should  be  excluded,  so  long  at  least 
as  no  ground  of  distinction  can  be  pointed  out 
more  fundamental  than  the  one  which  excludes 
them.  Nothing  can  be  more  suggestive  and 
fruitful  than  the  occurrence  of  these  examples 
of  phenomena  that  only  apparently  belong  to  a 
group ;  as  we  are  at  once  led  to  a  more  precise 
examination,  sure  to  eventuate  in  a  better  under- 


46       Enterprise  and  Production 

standing  and  classification  of  them.  And  this 
because  if  the  selected  peculiarity  really  roots 
deep  into  the  nature  of  things,  the  group  pos- 
sessing it  is  a  real  group,  possessing  plainly 
marked  and  important  characteristics  that  en- 
title it  to  be  considered  separately.  If  we  find 
it  to  bear  a  close  relation  to  the  science  we  are 
considering,  a  place  has  to  be  found  for  it,  and 
any  one  disputing  the  place  claimed  is  under  the 
obligation  of  pointing  out  a  better  place,  the 
existence  of  the  class  as  a  class  being  no  longer 
contendable.  Cases  of  course  will  occur  in  the 
Moral  Sciences  when  discoveries  of  this  kind 
arise,  and  they  always  mark  an  advance  in  the 
science  in  which  they  are  made.  Moreover  they 
occur  quite  frequently  when  the  first  application 
of  the  deductive  method  of  classification  is  to 
the  sub-division  of  a  sub-class  which  is  itself  as 
yet  only  inductively  determined,  and  therefore 
very  probably  neither  accurately  nor  authorita- 
tively, but  only  approximately,  settled.  The 
positive  determination  of  such  a  sub-class  by 
deduction  will  generally  expose  inaccuracies  in 
its  previous  subdivision,  as  the  inaccuracy  or 
incompleteness  of  the  major  premise  connotes 
inaccuracy  and  incompleteness  in  the  deductive 
results  obtained  by  its  use.  We  have,  therefore, 
no  right  to  be  confident  of  any  subsidiary  defin- 
ition in  a  moral  science  until  the  most  general 


Deductive  Classification        47 

class  of  all  included  in  the  science,  that  is  the  sub- 
ject matter  of  the  science  itself,  is  deductively 
established  from  indisputable  premises  and 
therefore  satisfactoril}'  defined. 

The  third  requisite  for  valid  classification  is 
that  each  sub-group  should  be  demarcated  from 
the  others,  not  by  means  of  general  differences 
or  resemblances  between  individuals,  but  by  the 
one  point  of  difference  or  resemblance  that  is 
the  most  germane  and  radical  to  be  found,  and 
is,  therefore,  the  fundamental  one.  Cuvier 
applied  this  principle  to  biology  when  he  subdi- 
vided the  animal  kingdom  into  groups  demar- 
cated from  each  other  by  peculiarities  of  their 
bony  framework  and  internal  organs.  Why  are 
differences  founded  on  these  peculiarities  funda- 
mental to  biology?  Simply  because  observation 
has  shown  us  that  they  vary  less  rapidly  than 
other  peculiarities  of  animals,  and  therefore 
mark  the  evolution  of  species,  and  contain  the 
history  of  the  development  of  life  from  its  sim- 
plest to  its  most  complex  forms,  which  is  the  most 
important  problem  of  biology.  In  South  Amer- 
ica a  species  of  moth  so  closely  resembles  a 
species  of  butterfly  as  to  be  almost  indistin- 
guishable from  it,  and  the  two  would  be  classed 
together  by  any  one  classifying  from  general  dif- 
ferences and  resemblances, but  such  a  grouping  is 
manifestly  of  no  value  to  the  science  of  biology. 


48       Enterprise  and  Production 

Now  I  fear  economists  are  frequently  open 
to  the  charge  of  disregarding  this  essential 
principle.  For  instance  some  of  our  ablest 
economists  identify  land  with  capital  because 
a  general  resemblance  arises  from  the  fact  that 
the  value  of  land  can  be  capitalised,  or  because 
more  capital  has  been  expended  upon  land  in 
drainage,  fences,  and  other  improvements  that 
affect  its  productive  power,  than  the  value  of 
the  land  amounts  to.  But  does  not  the  distinc- 
tion between  land  and  capital,  which  is  really 
fundamental  to  the  science,  arise  from  the  na- 
ture of  the  use  to  which  they  are  put,  or  to  their 
function  in  production,  rather  than  from  any 
general  resemblance  due  to  their  having  a  com- 
mon denominator  or  a  common  origin  ?  This 
is  necessarily  so  because  the  character  of  the 
motives  leading  to  the  utilisation  of  land  and 
capital  and  to  their  appropriation  or  accumula- 
tion varies  with  the  nature  of  the  income  ex- 
pected, the  character  of  which  is  dependent 
upon  function  and  not  origin. 

The  fourth  requisite  of  valid  scientific  classi- 
fication is  that  the  various  co-classes,  into  which 
any  given  genus  is  divided,  shall  each  be  distin- 
guished by  a  peculiarity  of  the  same  kind.  If 
I  may  be  allowed  to  illustrate  by  the  controversy 
over  the  Risk  Theory  of  Profit,  it  should  not 
have  required  demonstration,  if  this  principle 


Deductive  Classification        49 

of  classification  is  correct,  that  the  reward  for 
the  assumption  of  a  risk,  when  the  assumption 
of  risk  is  once  recognised  as  a  separate  indus- 
trial function,  could  not  accrue  to  any  of  the 
other  productive  factors  so  long  as  they  were 
distinguished  from  each  other  by  the  character 
of  their  functions.  So  long,  that  is,  as  rent, 
interest,  and  wages  act  as  the  incentive  to  the 
use  of  land,  the  use  of  capital,  and  the  exertion 
of  labour,  it  should  have  been  axiomatic  that  the 
reward  of  risk  must  serve  as  the  incentive  to 
some  industrial  factor  other  than  land,  capital, 
or  labour,  and  could  not  accrue  to  the  co- 
ordinator as  such,  who  is  only  a  labourer,  or  to 
the  capitalist  as  such. 

A  fifth  principle  of  classification  is  that  the 
subdivisions  of  a  genus  shall  not  overlap,  or  in 
other  words  that  no  individual  shall  belong 
equally  to  two  or  more  of  the  subdivisions.  It 
is  not  meant  by  this  that  we  should  always  be 
able  to  determine  positively  the  sub-group  to 
which  any  given  individual  should  be  assigned. 
Our  knowledge  of  the  specific  individual  may 
be  insufficient,  especially  in  a  classification  of 
actions  in  accordance  with  the  motives  that 
cause  them,  as  cases  constantly  arise  in  which 
the  motives  are  complex.  Nor  is  it  intended 
that  compound  individuals  may  not  be  assigned 
to  two  or  more  groups,  according  to  the  point 

4 


50      Enterprise  and  Production 

of  view  from  which  they  are  regarded.  Thus 
the  activity  of  judges,  soldiers,  and  policemen 
is  social  so  far  as  society's  action  in  hiring  them 
is  concerned.  Society's  motive  in  hiring  them 
is  the  common  good  ;  and  the  actual  product  of 
their  labours  is  an  element  of  social,  not  of 
economic  "  weal."  On  the  other  hand  the  ac- 
tions of  this  class,  viewed  from  the  standpoint 
of  their  own  motives  are  economic.  Their  in- 
centive is  the  salary,  wages,  or  fees  society  pays 
them ;  and  their  labour  is  productive  to  them- 
selves of  an  income  of  wages,  composed  of 
purchasing  power,  which  is  an  economic  quan- 
tity. We  have  in  this  case  of  combined  human 
activity  only  an  instance  where  one  party  to  the 
combination  is  actuated  by  social  and  the  other 
by  economic  motives  ;  and  the  activity  itself  is 
social  or  economic  according  to  the  standpoint 
from  which  we  regard  it.  But  there  is  no  over- 
lapping of  sub-groups,  nor  any  necessary  con- 
fusion of  thought  because,  when  the  point  of 
view  is  once  selected,  there  is  absolutely  no 
doubt  as  to  the  class  to  which  the  activity  in 
question  belongs. 

A  sixth  principle  of  classification  is  that  the 
distinguishing  peculiarity  utilised  should  be 
dynamic  and  not  merely  incidental.  Thus  the 
definition  of  Economics  as  the  Science  of  Ex- 
change, when  the  exchange  between  persons  is 


Deductive  Classification        51 

intended  by  the  term,  gives  practically  the  same 
scope  as  the  definition  I  will  shortly  propound, 
because,  as  has  been  shown  elsewhere,  exchange 
is  not  only  a  necessary  part  of  the  only  process 
by  means  of  which  activities  can  be  combined 
for  personal  purposes,  but  it  is  incidental  to  no 
other  process.  But  the  definition  of  Economics 
as  the  Science  of  Exchange  was  rightly  aban- 
doned and  neglected  because  it  teaches  us 
nothing  of  causes.  Exchange  is  a  means,  not  an 
end  or  a  purpose ;  and  the  explanation  of 
volitional  activities  must  be  sought  in  the 
motives  which  cause  them  and  not  in  the  means 
incidentally  adopted  to  accomplish  purposes. 

A  seventh  principle  of  scientific  classifi- 
cation is  that  the  distinction  between  species 
must  be  founded  on  a  difference  in  kind,  and 
not  one  of  degree.  We  do  indeed  in  common 
speech  draw  distinctions  of  degree,  as  when  we 
speak  of  larger  animals  as  compared  with  smaller, 
and  we  affirm  rightly  enough  that  certain  differ- 
ences between  animals  are  due  to  their  relative 
size.  But  classification  founded  on  degree  is 
unfitted  for  scientific  use,  because  it  affords  no 
basis  for  drawing  a  dividing  line  between  the 
individuals  possessing,  for  instance,  the  peculi- 
arity due  to  their  larger  size,  and  the  individuals 
lacking  the  peculiarity  because  of  their  smaller 
size.     Moreover   the   peculiarity   in  question, 


52      Enterprise  and  Production 

being  relative,  could  be  affirmed  of,  or  denied 
to,  any  animal,  accordingly  as  it  was  compared 
with  one  smaller  or  larger  than  it.  Individuals 
cannot  therefore  be  definitely  grouped  by  dif- 
ferences in  degree,  and  the  precise  and  orderly 
arrangement  of  knowledge,  in  which  science  con- 
sists, cannot  be  obtained  by  any  classification 
founded  on  degree. 

This  summary  of  the  principles  governing 
deductive  classification,  though  by  no  means 
exhaustive,  and  perhaps  too  concisely  stated, 
suffices  to  indicate  the  only  process  that  can 
rightly  claim  authority.  The  validity  of  the 
principles  laid  down  will  hardly  be  disputed,  as 
more  or  less  regard  has  always  been  paid  to  each 
of  them,  though  rarely  to  all  of  them  by  any 
one  writer,  nor  has  the  obligation  of  conforming 
every  economic  definition  and  classification  to 
all  of  them  ever,  so  far  as  I  know,  been  distinctly 
recognised  and  submitted  to. 


CHAPTER  IV 

A  POSITIVE  DEFINITION  OF  ECONOMICS 

THE  object  of  all  consciously  directed  human 
thought  and  action  is  the  enjoyance  of 
happiness  and  the  avoidance  of  pain,  or  in 
other  words  "well-being"  or  **weal.**  The 
fundamental  distinction  between  human  activ- 
ities is  evidently  between  the  altruistic  and 
the  egoistic,  the  latter  division  being  of  course 
the  one  in  which  economic  activities  are  in- 
cluded. The  problem  of  defining  Economics 
is  therefore  only  resolvable  by  differentiating 
economic  activities  from  other  egoistic  human 
activities. 

Now  there  are  only  three  methods  of  deduc- 
tively classifying  egoistic  activities  possibly 
applicable  to  our  purpose,  namely :  first,  by  the 
character  of  the  ends  to  be  attained  ;  second,  by 
the  means  adaptable  to  the  attainment  of  ends  ; 
or,  third,  by  the  methods  adopted  for  the 
attainment  of  ends— as  in  these  three  differ- 
entiations all  possible  variations  of  motive  are 

53 


54      Enterprise  and  Production 

involved.  We  can  say  that  some  egoistic  ac- 
tivities are  directed  to  the  attainment  of  physical 
benefits,  others  to  intellectual  progress,  others 
to  moral  development,  etc.,  but  a  moment's 
consideration  will  make  it  evident  that  the 
character  of  the  result  of  human  actions  is  not 
the  principle  upon  which  we  can  found  our 
classification,  because  in  many  instances  results 
of  the  same  character  can  be  obtained  by  either 
individual,  social,  or  economic  endeavour.  We 
have  no  better  success  when  we  turn  to  the 
second  possible  method  of  classification ;  namely 
that  of  the  means  (in  the  narrow  sense  of  the 
term,  exclusive  of  methods)  adaptable  to  the 
acquisition  of  "  weal."  We  can,  and  do,  use 
our  intellectual  powers,  our  physical  powers,  and 
the  powers  of  nature,  mechanically  adapted,  for 
the  enhancement  of  our  well-being;  but  economic 
activities  refuse  to  group  themselves  under  any 
one  of  these  headings,  as  all  these  forces  are  alike 
exercised  in  individual,  social,  and  economic 
endeavour.  Since  the  distinguishing  peculiarity 
we  are  in  search  of  is  to  be  found  neither  in  the 
character  of  the  result  obtained,  nor  in  the 
means  employed  to  bring  about  results,  it  must 
depend  upon  a  difference  in  method.  If,  then, 
we  can  discover  any  radical  difference  between 
the  methods  employed  in  individualistic,  social, 
and  economic  activities,  we  are  forced  to  define 


A  Definition  of  Economics      55 

each  of  the  three  kinds  of  activities,  in  ternns  of 
its  peculiar  method. 

When  we  approach  the  problem  of  defining 
Economics  from  the  standpoint  here  indicated, 
we  cannot  fail  very  shortly  to  appreciate  that 
there  can  be  no  more  radical  or  fundamental 
difference  in  method  between  Individual,  Social, 
and  Economic  egoistic  activity  than  this :  the 
first  class  of  actions  are  those  of  the  individual 
acting  by  himself  alone  without  any  combina- 
tion with  others,  and  for  himself  alone.  When 
an  individual  by  his  own  unaided  efforts  creates 
a  product  not  for  his  own  consumption,  but  to 
be  exchanged,  his  activity  is  of  course  combined 
with  that  of  the  person  with  whom  he  exchanges. 
The  object  of  the  individual  producer  for  ex- 
change is  not  the  product  itself,  but  the  power 
of  purchasing  possessed  by  his  product.  But  a 
product  cannot  possess  any  power  to  purchase 
unless  something  exists  for  which  it  can  be  ex- 
changed. The  very  existence  of  exchange 
value  depends  therefore  on  a  combination  of 
buyer  and  seller.  The  second  class  of  actions 
are  those  in  which  two  or  more  individuals  com- 
bine to  produce  a  result,  or  product,  the  share 
of  which,  that  will  accrue  to  each  individual 
concerned,  is  indefinite  and  indeterminate, — 
indeed  often  so  indefinite  and  indeterminate 
that  a  considerable,  and   sometimes  even  the 


5^      Enterprise  and  Production 

greater,  part  of  the  resulting  benefit  will  be  en- 
joyed by  those  who  had  nothing  to  do  with 
bringing  it  about.  Or  in  other  words  a  social 
egoistic  activity  is  one  in  which  actions  are  com- 
bined for  a  mutual,  social,  or  common  purpose, 
in  the  benefit  of  which  each  participant  in  the 
activity  expects  only  an  indefinite  and  unpre- 
determined  share,  almost  or  entirely  unrelated 
to  his  personal  contribution  to  production.  The 
third  class— namely  the  economic — are  com- 
bined actions  entered  into  by  each  participant 
because  he  expects  a  share  of  the  resulting 
benefit  bearing  a  definite  and  prearranged  rela- 
tion to  his  contribution  to  its  creation. 

Tersely  expressed,  individual  actions  are 
those  performed  by  an  independent  person  for 
personal  purpose ;  social  actions,  those  per- 
formed in  combination  with  others  for  indefinite, 
or  impersonal,  purposes ;  and  economic,  those 
performed  in  combination  with  others  with  a 
definite  personal  purpose. 

It  will  probably  be  objected  by  some  that 
there  are  other  activities,  usually  considered  to 
be  economic,  that  this  third  group  does  not  in- 
clude. In  the  course  of  this  treatise  it  will 
become  incidentally  evident  that  these  omitted 
activities  are  only  indirectly  related  to  the  sub- 
ject and  are  not  really  economic.  The  point 
here  to  be  insisted  upon  is  this ;  that  if  the  act- 


A  Definition  of  Economics      57 

ivities  in  dispute  are  really  economic  it  can  only 
be  because  economic  phenomena  can  be  segrega- 
ted by  a  more  radical  and  fundamental  principle 
of  division  among  egoistic  activities  than  the 
one  I  have  utilised.  Manifestly  this  is  impos- 
sible, as  the  only  more  fundamental  difference 
in  incentive  is  when  the  benefit  sought  is  for 
others,  and  that  marks  the  distinction  between 
altruistic  and  egoistic  actions. 

Now  how  can  actions  be  combined  for  defi- 
nite personal  purposes,  that  is  for  a  pre-arranged 
division  of  the  benefit  of  the  result  definitely 
dependent  upon  contribution  ?  At  first  sight  it 
would  appear  that  there  are  two  possible  meth- 
ods of  doing  this.  The  first  is  that  of  commu- 
nism, in  which  the  product  is  either  equally 
divided  among  all  individuals  or  among  all  con- 
tributing to  production,  or  divided  in  arbitra- 
rily pre-arranged  percentages  not  dependent 
upon  contribution.  The  second  is  the  usual,  or 
competitive,  method  in  which  one  of  a  group  of 
individual  contributors  hires  the  others  by  giv- 
ing each  a  definite  and  predetermined  personal 
reward,  based  upon  his  supposed  usefulness,  and 
assumes  the  whole  of  the  resulting  benefit,  or  the 
ownership  of  the  product. 

What  we  are  defining  is  not  a  group  of  indi- 
viduals, but  a  group  of  human  actions,  segregat- 
ing those   in    which   the    combination   is   for 


58      Enterprise  and  Production 

definite  and  predetermined  personal  ends,  how- 
ever the  functions  exercised  may  be  distributed 
among  individuals.  If  we  examine  into  the 
character  of  the  productive  functions  it  appears 
that,  if  the  Risk  Theory  of  Profit  is  correct,  not 
only  economic  but  also  individualistic  and  social 
functions  are  divisible  into  four  fundamentally- 
distinct  kinds,  two  of  which — those  of  land  and 
capital — are  uses,  that  is  are  acted  upon  and 
therefore  passive,  and  two  of  which— those  of 
labour  and  enterprise — are  active  and  involve  im- 
mediate personal  sacrifice, — in  the  one  case  the 
pain  cost  of  labour,  and  in  the  other  the  irksome- 
ness  of  risk  and  responsibility,  whereas  there  is 
no  personal  sacrifice  in  the  use  but  only  in  the 
acquirement  of  land  and  capital. 

Now  in  a  communistic  group  each  individual 
is  landlord,  capitaHst,  labourer,  and  enterpriser. 
His  individual  share  of  the  "  weal  "  produced  by 
the  united  efforts  of  the  community  is  not  only 
practically  indivisible  into  rent,  interest,  wages, 
and  profit — thus  destroying  the  opportunity  for 
the  interplay  of  economic  inducements — but  it 
depends  only  to  an  infinitesimal  degree  upon 
his  own  contribution.  If  he  labours  honestly 
and  his  efforts  prove  effective,  it  is  not  because 
he  has  been  actuated  to  any  considerable  de- 
gree by  his  own  personal  ends,  but  because  he 
has  been  moved  by  altruistic  or  social  motives, 


A  Definition  of  Economics     59 

or  because  he  has  been  coerced  into  activity. 
The  motives  for  the  creation  of  "weal,"  ef- 
fective within  such  a  group  as  the  Oneida  Com- 
munity, as  at  first  instituted,  are  not  those  which 
lead  men  to  combine  their  efforts  for  definite 
personal  ends,  and  the  resulting  actions  must 
therefore  be  excluded  from  the  group  of  human 
activities  that  our  classification  declares  to  be  eco- 
nomic. Such  combinations  are  distinctly  social 
because  there  is  lacking  a  definite  personal  rela- 
tion between  the  incentive  to  and  the  reward 
for  combined  exertion.  It  is  only  when  the 
Oneida  Community  entered  into  competitive 
dealings  with  the  outside  world  that  economic 
considerations  became  effective ;  and  the 
Science  of  Economics  must  therefore  regard  the 
community  as  constituting  a  single  economic 
individual.  And  if  it  should  ever  come  to  pass 
that  the  whole  world  was  organised  into  a  single 
communistic  group,  combined  human  activity 
for  personal  ends,  and  therefore  economic  act- 
ivity, would  be  an  impossibility.  Similarly  in 
any  group  of  individuals  combined  for  social 
purposes,  the  incentive  to  contribute  labour  or 
taxes  and  to  assume  responsibility  is  not  per- 
sonal. When  the  state  pays  wages  the  incentive 
to  labour  is  indeed  personal  and  will  be  hereafter 
explained  and  accounted  for. 

The  case  of  a  co-operative  group  is  different 


6o      Enterprise  and  Production 

from  that  of  a  communistic  group  in  that  the 
individuals  composing  it  do  not  necessarily  con- 
tribute the  use  of  land,  the  use  of  capital,  and 
their  labour  in  the  same  proportions,  nor  do  they 
share  equally  in  the  product.  Such  a  group 
differs  from  an  ordinary  group  of  competitive 
individuals,  combined  for  economic  "  weal " 
production  only  in  that  the  functions  of  the 
entrepreneur,  the  landlord,  and  the  capitalist, 
or  some  of  them  at  least,  are  performed  by  the 
group  as  a  whole  and  not  by  a  selected  part  of 
the  group.  And,  as  the  individual  members 
share  the  results  of  the  risk  and  responsibilities 
in  the  same  proportion  as  they  contribute  other- 
wise to  the  creation  of  the  product,  there  is  the 
definite  personal  relation  between  enterprise 
and  its  result  required  by  our  definition.  There 
exist  therefore,  at  least  to  a  considerable  extent, 
similar  personal  incentives  to  the  utilisation  of 
land  and  capital,  to  the  exertion  of  personal 
effort,  and  to  caution  and  care  in  the  selection 
of  risks  and  the  assumption  of  responsibilities, 
that  actuate  the  members  of  a  group  composed 
of  competitive  individuals  acting  under  the  di- 
rection of  a  single  entrepreneur.  The  internal 
as  well  as  the  external  relations  of  a  co-operative 
group  are  practically  economic  and  not  social, 
unless,  of  course,  as  is  apt  to  be  the  case  in  such 
associations,  a  certain  proportion  of  the  unpre- 


A  Definition  of  Economics      6i 

determined  residue,  or  of  the  gross  product,  is 
not  divided  directly  among  the  members  of  the 
group  in  supposed  proportion  to  contribution, 
but  is  devoted  to  social  purposes. 

Nevertheless,  while  the  external  relations  of 
a  co-operative  group  are  entirely  economic,  the 
internal  relations  are  not  always  wholly  so  in 
practice,  because,  under  this  system  of  industry, 
the  relation  of  income  to  contribution  is  not 
quite  so  definite  as  is  the  case  when  the  enter- 
prisers are  a  distinct  group  of  individuals.  The 
manager,  whose  powers  are  only  delegated  to 
him,  and  who  remains  such  only  on  sufferance, 
cannot  well  hold  the  delegators  to  quite  as  rigid 
an  account  as  if  he  were  the  owner  of  the  enter- 
prise, or  directly  responsible  to  the  owner. 
There  is,  therefore,  some  taint  of  social  purpose 
in  all  such  enterprises,  and  it  is  this  which,  as  a 
rule,  has  hitherto  stood  in  the  way  of  any  long 
continued  success  in  their  operation. 

It  is  also  to  be  feared  that  trade  unionism  is 
infusing  a  taint  of  social  purpose  into  the  pres- 
ent form  of  economic  activity.  The  entrepre- 
neur, when  forced  to  obtain  his  labour  through 
collective  bargaining,  cannot  insist  as  forcibly 
as  before  on  each  individual  labourer  contribut- 
ing to  the  product  in  strict  accordance  with  the 
wages  he  has  been  promised.  This  effect  is  now 
being  extensively  commented  upon,  as  shown 


62      Enterprise  and  Production 

in  opposition  to  piece  work,  objections  to  im- 
proved processes  and  machinery,  the  insistence 
upon  a  minimum  wage  and  a  maximum  of  work 
the  individual  is  allowed  to  perform,  and  in 
various  other  ways.  A  trade  union  really  in- 
volves some  substitution  of  the  social  for  the 
economic  motive  in  the  internal  relations  of  the 
group  of  employees.  The  union  becomes  itself 
an  economic  individual,  and  the  persons  who 
compose  it  lose  their  economic  individuality  to 
the  extent  that  they  refuse  to  labour  except  as 
members  of  the  group,  and  subject  to  rules  and 
regulations,  whose  purpose  is  social  rather  than 
personal. 

The  combination  of  egoistic  human  activities 
for  definite  personal  ends  involves  therefore  a 
certain  method  of  combination  as  the  only  one 
possible  for  such  activities ;  namely,  that  some 
individual,  or  group  of  individuals,  theoretically 
and  practically  distinguishable,  must  assume  the 
responsibility  of  the  enterprise,  and  the  direction 
of  the  undertaking  inseparable  from  the  respon- 
sibility, and  that  by  so  doing  the  risk-takers 
necessarily  acquire  the  exclusive  ownership 
of  the  product,  and  reward  those  who  contribute 
the  use  of  land,  the  use  of  capital,  and  personal 
exertion,  not  with  any  share  of  the  product  it- 
self, but  with  stipulated  amounts  of  purchasing 
power,  bearing  a  definite  relation  in  each  case 


A  Definition  of  Economics       63 

to  each'  participant's  supposed  contribution  to 
the  result. 

A  great  difficulty  in  reasoning  on  economic 
subjects,  responsible  perhaps  more  than  any 
other  for  confusion  of  thought,  especially  on 
the  part  of  the  public,  is  the  failure  to  dis- 
criminate between  the  individual  as  such,  and 
the  individual  regarded  solely  as  the  exerciser 
of  a  given  function.  Thus  when  we  speak  of 
the  entrepreneur  what  we  are  apt  to  have  in 
mind  is  the  individual  who  not  only  assumes 
the  responsibility  for  the  undertaking,  and  in 
whom  the  ownership  of  the  product  inheres, 
but  who  is  also  to  some  extent  both  a  labourer 
and  a  capitalist.  So  also  when  we  speak  of 
the  capitalist,  it  is  the  individual  who  con- 
tributes capital  and  not  the  loaner  of  capital 
simply  as  such  that  we  are  apt  to  consider,  and 
similarly  of  the  landlord  and  labourer.  As  a 
matter  of  fact,  it  is  impossible  to  exercise  a 
single  productive  function  separately.  Thus, 
as  to  a  hired  labourer  the  product  of  a  day's 
labour  is  the  daily  wage  received,  the  purchasing 
power  of  which  is  liable  to  change,  he  does  not 
wholly  escape  the  responsibility  of  ownership, 
and  from  his  point  of  view  as  an  individual,  a 
certain  very  small  part  of  his  remuneration  is 
the  reward  of  an  economic  risk.  Likewise  the 
landlord  has  to  take  the  risk  of  a  change  in  the 


64      Enterprise  and  Production 

value  of  his  holding.  As  the  owner  of  his  land, 
he  is  an  entrepreneur.  It  is  only  in  the  renting 
it  (to  another  or  to  himself)  that  he  acts  as  a 
landlord.  The  capitalist  also  runs  a  chance  of 
not  being  repaid,  and  a  good  part,  indeed  over 
half,  of  the  gross  interest  he  charges  is  not  in- 
terest at  all,  but  insurance.  Finally,  the  entre- 
preneur is  usually  a  capitalist,  sometimes  a 
landlord,  and  always  a  labourer.  Every  indi- 
vidual income  is  composite  and  is  the  joint  re- 
ward for  the  exercise  of  never  less  than  two 
productive  functions.  As  a  different  set  of 
tendencies  of  laws  regulate  the  income  arising 
from  the  exercise  of  each  function,  we  fairly 
jump  into  error  when  we  reason  as  if  an  indi- 
vidual income  were  subject  to  only  one  set  of 
these  tendencies. 

Another  prolific  source  of  error  against  which 
the  reader  must  be  cautioned  arises  from  the 
assumption,  usually  a  tacit  one,  that  Economics 
is  concerned  with  the  productive  aspect  of 
human  actions.  Ostensibly  by  product,  an  ex- 
changeable product  only  is  meant,  and  land, 
capital,  labour,  and  enterprise  are  considered 
such  only  when  engaged  in  the  creation  of  ex- 
changeable products.  The  trouble  is  that  every 
result  of  human  activity  is  a  product,  but  indi- 
vidualistic and  social  results  are  not  exchange- 
able, though  they  are  due  to  the  exercise  of 


A  Definition  of  Economics      65 

the  same  four  productive  functions  that  produce 
exchangeable  values.  The  attempt,  therefore, 
practically  universal,  to  employ  land,  capital, 
labour,  and  enterprise  as  exclusively  economic 
terms,  thus  denying,  or  at  least  ignoring  the  fact 
that  all  individualistic  and  social  results  are  due 
to  the  exercise  of  identically  the  same  functions 
as  those  which  create  economic  products,  is  to 
invite  misconceptions. 

It  is  only  when  we  view  the  matter  abstractly 
that  landlords,  capitalists,  and  labourers  can  be 
said  to  share  in  the  product.  The  creation  of 
an  economic  product  involves  the  creation  of 
an  equivalent  amount  of  purchasing  power ;  and 
it  is  this  newly  created  purchasing  power,  and 
not  the  product  itself,  which  is  divided  among 
the  productive  factors.  A  distinguishing  mark 
of  an  economic  action  is  that  its  governing 
purpose  is  not  the  creation  of  utility,  but  the 
creation  of  command  over  utilities  in  general, 
or  purchasing  power.  And  the  point  to  be  ob- 
served here  is  that  purchasing  power  cannot  be 
evolved  in  any  other  way  than  through  the 
utilisation  of  land,  capital,  and  labour,  or  of  two 
or  more  of  them  combined,  by  enterprise.  Or 
in  other  words  the  "  indirect  method  of  pro- 
duction"— that  is,  the  satisfaction  of  wants 
through  exchange — is  necessarily  coincident 
with  the  combination  of  human  activities  for 


66      Enterprise  and  Production 

definite  personal  ends.    Each  expression  exactly 
connotes  the  other. 

It  may  be.  objected  here  that  the  combina- 
tion between  buyer  and  seller  differs  in  character 
from  that  between  the  enterpriser  and  his 
employees.  An  analysis  of  the  two  operations, 
however,  makes  it  evident,  that  what  difference 
there  is,  is  not  in  the  character  but  only  in  the 
complexity  of  the  transactions.  In  the  extreme 
case  of  barter  between  hunter  and  fisher,  what 
the  hunter  obtains  by  producing  game  is  not 
the  game  itself  but  the  power  of  the  game  to 
purchase  fish.  When  barter  is  supplanted  by 
the  use  of  money,  his  power  to  purchase  be- 
comes general  instead  of  specific.  The  change 
is  not  in  character  but  simply  in  complexity. 
So  when  the  employer  hires  a  labourer,  what 
he  buys  is  not  the  effort  but  the  result  of  the 
effort,  or  in  other  words  a  new  space  relation. 
For  this  he  pays  money — that  is,  abstract  pur- 
chasing power.  If  he  uses  the  newly  created 
space  relation  for  his  individual  benefit,  his  case 
is  exactly  analagous  to  that  of  the  fisher  who 
buys  the  hunter's  game  with  money,  for  the 
purpose  of  consuming  it  himself.  If  he  utilises 
the  new  space  relations  in  exchange,  his  action 
is  similar  to  that  of  the  fisher  who  buys  the 
hunter's  game,  not  for  his  own  consumption 
but  to  trade  for  something  else.     On  the  other 


A  Definition  of  Economics      67 

hand  the  hired  labourer  sells  the  space  relations 
he  creates  either  for  purchasing  power  in  gen- 
eral, that  is  for  money,  or  for  a  specific  amount 
of  food  or  other  necessity — that  is,  he  creates 
a  new  space  relation  on  account  of  its  power  to 
purchase  either  things  in  general,  or  a  specific 
thing,  which  is  just  what  the  hunter  does  in 
procuring  game  for  exchange.  There  is  abso- 
lutely no  difference  in  the  essential  character 
of  the  combination  between  buyer  and  seller, 
and  in  that  between  employer  and  employe. 
In  both  cases  the  object  of  production  is  not 
the  product  itself,  but  the  power  of  the  product 
to  purchase.  It  is  only  the  final  consumer  who 
is  interested  in  the  product  for  itself.  The 
independent  labourer  producing  for  exchange, 
that  is  the  one  who  is  his  own  employer,  differs 
from  the  hired  labourer  only  in  this,  that  he 
selects  the  space  relations  he  creates,  instead  of 
creating  such  space  relations  as  his  employer 
selects,  because  the  power  of  selection  pertains 
to  the  ownership.  In  the  former  case  he  com- 
bines the  functions  of  enterprise  and  labour, 
whereas  in  the  latter  he  confines  himself  to  the 
latter  function,  and  abdicates  the  former  in 
favour  of  his  employer. 

Instead  of  founding  the  primary  classification 
of  egoistic  activities  upon  the  distinction  be- 
tween individual  and  combined  action,  we  can 


68       Enterprise  and  Production 

found  it  upon  direct  and  indirect  methods,  the 
direct  method  being,  of  course,  that  in  which 
the  special  thing  desired  is  produced  either  im- 
mediately, or  ultimately  by  the  aid  of  tools ; 
the  indirect  method  being  that  whereby  the 
desired  object  is  obtained  by  making  something 
not  desirable  for  itself,  but  capable  of  being 
exchanged  for  the  desired  article.  This  classi- 
fication, however,  results  in  exactly  the  same 
arrangement  as  that  founded  upon  combination, 
the  only  difference  being  that  in  the  latter  case 
individual  actions  form  a  class  by  themselves, 
while  social  and  economic  actions  are  sub- 
groups of  the  complementary  class  of  combined 
actions:  whereas  in  the  former  case  economic 
actions  form  a  class  by  themselves  of  indirect 
activities,  while  individual  and  social  actions 
are  sub-groups  of  the  complementary  class  of 
direct  actions.  Although  the  principle  of  com- 
bination must  be  given  the  logical  preference, 
as  indirectness  is  only  a  means  by  which  com- 
bination is  effected,  and  therefore  only  an 
incident  to  one  form  of  combination,  which 
method  is  logically  entitled  to  preference  does 
not  affect  our  argument,  for  both  classi- 
fications involve  the  same  arrangement ;  and 
the  definition  of  Economics  here  given 
utilises  both  together,  the  idea  of  direct- 
ness being  involved   in  the  term  "  purchasing 


A  Definition  of  Economics      69 

power."     This  definition  may  be  formulated  as 
follows : 

Economics  is  the  study  of  the  interrelations  of 
that  group  of  egoistic  human  activities  which 
are  incited  by  the  expectation  of  definite  personal 
shares,  pre-arranged  in  supposed  conformity  to 
functions  performed,  of  the  purchasing  power 
resulting  from  the  Joint  activity  of  two  or  more 
individuals  ;  and  of  their  outer  relations,  or  how 
these  activities  and  their  results  are  affected  by 
the  physical,  ethical,  and  social  environment,  and 
by  changes  in  the  environment. 

As  the  purchasing  power  obtained  in  a  given 
time  by  any  individual  is  what  is  meant  when 
his  income  is  spoken  of,  perhaps  the  best  terse 
definition  of  the  science  is  that  **  Economics  is 
the  science  of  Industrial  Income." 

To  guard  against  possible  misunderstanding, 
I  would  say  that  by  "  definite  "  I  mean  only 
pre-arranged,  and  do  not  mean  pre-determined 
in  amount.  The  shares  of  three  productive 
factors  are  indeed  so  pre-determined :  that  of 
the  entrepreneur  is  not,  but  it  is  none  the  less 
pre-arranged  and  defined,  in  that  he  is  to  get 
whatever  is  left  over  after  the  pre-determined 
claims  of  others  are  satisfied.  The  word  "In- 
dustrial '*  I  put  before  **  Income  "  to  exclude 
the  incomes  of  the  thief,  the  unprofessional 
gambler,  and   the  speculator — the  purchasing 


70      Enterprise  and  Production 

power  obtained  by  these  classes  not  being  a 
new  creation  of  value  arising  from  combined 
activity,  but  only  an  appropriation,  or  trans- 
ference, of  purchasing  power  previously  created, 
differing  from  the  income  of  the  monopolist  in 
that  the  latter  is  an  appropriation  of  an  undue 
(in  the  sense  of  "  greater  than  would  accrue 
under  free  competition  "),  but  still  definite  and 
pre-arranged  share  of  a  newly  created  purchas- 
ing power,  to  the  creation  of  which  the  monop- 
olist has  contributed ;  and  from  the  income  of 
the  professional  gambler,  who  does  perform  a 
service  for  which  his  dupes  are  willing  to  pay. 

The  definition  of  Economics  I  have  ventured 
to  suggest  differs  from  all  others,  with  which  I 
am  acquainted,  in  having  been  obtained  by  a 
deductive  process,  carried  out  in  accordance 
with,  what  appear  to  me  at  least,  sound  prin- 
ciples of  deductive  classification.  If  I  have 
succeeded  in  showing  that  the  deductive  method 
of  classification  is  capable  of  yielding  positive 
results,  and  if  my  synthesis  of  the  principles 
governing  deductive  classification  is  sufficiently 
complete,  and  if  I  have  correctly  conformed  to 
these  principles,  the  definition  is  a  positive  one 
— that  is  we  are  entitled  to  insist  upon  its 
being  recognised  and  accepted  as  segregating 
a  group  of  human  activities  very  important  for 
us   to   understand,  and   so   radically  different 


A  Definition  of  Economics      71 

from  all  other  human  activities  that  their  inter- 
relations cannot  be  adequately  comprehended, 
or  their  outer  relations  with  the  environment 
traced  or  understood,  so  long  as  their  bond  of 
union  is  ignored,  or  but  indifferently  compre- 
hended ;  which  is  to  say  that  this  group  of 
phenomena  is  the  proper  subject  for  special 
study,  and  that  conclusions  indubitably  estab- 
lished as  true  of  the  segregated  phenomena 
must  be  accepted,  whether  or  no  they  conflict 
with  previous  conceptions  and  whether  or  no 
all  economic  phenomena  are  included  in  the 
group.  Certainly  no  question  can  be  raised  as 
to  the  economic  character  of  any  single  action 
of  the  group  segregated,  nor,  as  I  hope  to  show 
later,  of  the  excluded  actions  being  primarily 
individuahstic  or  social  in  character. 

Our  definition  also  attains,  what  has  never 
before  been  accomplished,  clear  cut  distinctions 
between  the  three  universally  recognised  kinds 
of  human  activites — the  individual,  the  social, 
and  the  economic.  The  validity  of  the  defini- 
tion, as  a  definition,  will  I  think  hardly  be 
disputed,  but  it  may  be  objected  that  what  I 
have  defined  is  the  Science  of  Industry,  not  the 
Science  of  Economics.  This  objection  is,  as  we 
have  seen,  closed  to  those  who  look  upon 
economics  as  the  science  concerned  with  the 
creation  of  exchange   value,  as   the    scope  of 


72      Enterprise  and  Production 

such  a  science  is  confined  as  closely  as  the 
scope  of  our  definition  to  the  consideration  of 
industrial  phenomena;  the  objection  to  this 
definition  being  not  as  to  the  scope  covered 
by  it,  but  to  its  being  founded  upon  a  co-inci- 
dent, and  upon  its  ignoring  the  active  cause  to 
which  exchange  is  only  a  means. 

This  same  fatal  criticism  of  being  founded 
on  a  co-incident  applies  of  course  to  the  con- 
sideration of  Economics  as  the  science  con- 
cerned with  exchange  value  in  all  its  relations, 
and  covering  in  its  scope  the  destruction  and 
transfer  without  equivalent  of  exchange  value 
as  well  as  its  creation.  But  if  transfer  by  gift, 
theft,  or  inheritance,  and  consumption  are  really 
economic  phenomena,  those  who  hold  to  this 
definition  of  the  science  are  entitled  to  the 
objection  to  our  definition  which  we  have  been 
considering,  that  it  identifies  industrial  with 
economic  phenomena.  To  make  the  objection 
destructive,  however,  it  will  devolve  upon  them 
to  show  that  the  general  laws  governing  in- 
dustrial phenomena  are  also  the  general  laws 
regulating  gifts,  thefts,  inheritance,  and  con- 
sumption, and  how  the  universally  recognised 
distinction  between  individualistic,  economic, 
and  social  phenomena  can  be  preserved  if  man- 
ifestly individualistic  actions  are  injected  into 
the  scope  of  Economics. 


A  Definition  of  Economics      73 

For  one  regarding  Economics  as  the  Science 
of  Value — in  the  wider  sense  of  the  term — it  is 
open  to  make  the  claim  that  the  scope  of 
Economics  includes  phenomena  that  are  not 
industrial.  Making  it,  however,  involves  the 
assertion  that  Economics  as  a  science  is  con- 
cerned with  a  certain  way  (and  really  the  only 
way)  of  determining  all  human  actions,  individ- 
ualistic and  social  as  well  as  industrial,  and 
even  indeed  every  conscious  thought  and  voli- 
tion— as  every  directed  thought,  volition,  or 
action  is  necessarily  purposeful,  and  purpose 
cannot  be  determined  upon  except  as  the  re- 
sult of  a  balancing  of  pros  and  cons,  that  is,  as 
the  result  of  valuing.  This  definition  there- 
fore, when  rightly  comprehended,  would  make 
Economics  the  Science  of  Motive  in  general, 
which  it  certainly  is  not.  Neither  can  the  con- 
clusion be  avoided  by  claiming  that  Economics 
is  concerned  only  with  the  motives  leading  us 
to  economise  our  efforts.  That  is  a  mere  ver- 
bal jugglery,  as  every  purposeful  action  is  per- 
formed in  obedience  to  a  judgment  of  precisely 
this  kind,  as  is  readily  perceived  when  we 
recognise  that  every  thought,  emotion,  and 
action  is  purposeful  exactly  as  it  intelligently 
follows  the  line  of  least  resistance.  It  will  hardly 
be  necessary  to  point  out  to  those  familiar  with 
economic  literature,  that  it  is  permeated  with 


74     Enterprise  and  Production 

misconceptions,  arising  from  treating  Econom- 
ics as  concerned  at  the  same  time  with  the 
whole  of  human  activity  and  yet  with  only  a 
part  of  it.  Not  only  are  such  terms  as  wealth, 
capital,  and  labour,  applicable  to  every  kind 
of  human  activity,  assumed  to  be  exclusively 
economic  terms,  but  theories,  such  as  the  Aus- 
trian Theory  of  Value  (really  a  general  law 
governing  all  human  motives),  are  treated  as 
purely  economic,  without  a  thought  of  their 
wider  application.  And  the  recasting  of  such 
theories  and  terms  will  of  course  be  distasteful, 
and  may  unconsciously  incline  some  to  reject 
our  definition. 

Others,  rightly  so  far  as  the  fact  itself  is  con- 
cerned, will  object  that  many  individualistic 
and  social  actions  which  our  definition  excludes 
from  the  body  of  the  science  have  an  economic 
aspect.  But  economic,  or  if  you  please  indus- 
trial, actions  have  also  individualistic  and  social 
aspects.  According  to  this  view  of  the  matter, 
I  have  mistaken  the  general  class  of  which 
economic  phenomena  are  a  sub-class,  and  hu- 
man activities  are  not  divisible  into  individual- 
istic, social,  and  economic  or  industrial  actions, 
but  every  activity  is  individualistic,  social,  or 
economic  according  to  the  aspect  or  point  of 
view  from  which  we  regard  it.  But  when  we 
come  to  analyze  any  one  of  these  three  kinds 


A  Definition  of  Economics      75 

of  aspects,  we  find  a  radical  difference  in  the 
members  of  each  group.  The  economic  aspect 
of  individualistic  and  social  actions  differs  in 
kind  from  the  economic  aspect  of  industrial 
actions.  The  primary  purpose  of  every  indus- 
trial action  is  economic,  whereas  the  primary 
purpose  of  every  individualistic  action  is  in- 
dividualistic, and  the  primary  purpose  of  every 
social  action  is  social.  In  supplying  his  per- 
sonal needs  every  one  creates  a  force  that  can 
be,  and  usually  is,  applied  in  economic  produc- 
tion, and  the  efificiency  of  that  force  is  also 
largely  dependent  upon  the  social  organisation. 
Efficiency  in  industry  is  not  often  the  primary 
purpose  of  either  individualistic  or  social  ac- 
tions, and,  if  it  were  so,  it  is  one  thing  to  cre- 
ate efficiency  in  production,  and  quite  another 
thing  to  exercise  it.  Manifestly  it  is  the  exer- 
cise of  this  efficiency,  or  in  other  words  indus- 
trial action  alone,  which  is  primarily  economic; 
while  the  creation  of  economic  efficiency  is 
only  one  of  the  means  by  which  individuals 
and  society  accomplish  their  individualistic  and 
social  ends.  The  laws  and  tendencies,  govern- 
ing the  creation  of  the  power  to  produce,  are 
evidently  in  a  wholly  different  class  from  the 
laws  and  tendencies  governing  the  methods  of 
exercising  the  power  when  acquired,  and  no- 
thing could  be   more   unscientific  than  their 


76     Enterprise  and  Production 

inclusion  on  the  same  basis  in  one  science,  for 
the  very  object  of  dividing  the  field  of  our  know- 
ledge into  separate  sciences,  is  to  bring  those 
things,  subject  to  similar  tendencies,  into  one 
group.  All  the  sciences  are  indeed  related,  but 
the  facts  and  results  of  each  are  merely  the  data 
of  the  others.  To  include  all  the  data  of  each 
science  in  our  definition  of  its  scope  would  be 
to  make  every  science  universal,  and  to  obliter- 
ate all  distinctions  between  them.  We  surely 
have  the  right  to  distinguish  economic  from 
other  human  actions,  and  if  so  human  activities 
must  be  the  general  class  of  which  economic 
activities  are  a  sub-class.  Because  economic 
activities  are  affected  by  other  activities  is 
no  more  a  reason  for  considering  these  other 
activities  economic  than  for  considering  physi- 
cal laws  economic,  because  they  also  influence 
economic  actions.  Individualistic  and  social 
phenomena  as  well  as  the  powers  of  nature,  are 
merely  the  environment  of  economic  activities, 
and  this  is  fully  recognised  in  our  definition. 

Of  course,  no  disparagement  of  them  is  in- 
tended in  insisting  that  individualistic  and  so- 
cial actions  should  be  excluded  from  the  body 
or  scope  of  Economics,  and  their  results  ac- 
cepted only  as  data,  for  the  reliability  of  which 
the  Sciences  of  Individualism  and  Sociology 
are  accountable.     What  Economics  is  respon- 


A  Definition  of  Economics      77 

sible  for,  as  to  Individualistic  and  Social  results, 
is  not  the  results  themselves,  but  only  their 
relation  to  purely  economic  phenomena.  Thus 
how  any  particular  gain  in  industrial  efficiency 
affects  the  productive  process  comes  within  the 
province  of  the  science,  as  does  also  any  gain 
in  efficiency  due  to  the  distribution  of  the 
product — due  that  is  to  industrial  causes ;  but 
how  any  gain  in  efficiency  due  to  individualistic 
or  social  causes  is  brought  about  is  a  matter, 
not  for  Economics  to  determine,  but  for  the 
decision  of  Individualism  and  Sociology ; 
whereas,  how  changes  in  distribution  arise  is 
wholly  a  matter  of  Economics.  And  surely 
there  is  no  way  of  discriminating  between  the 
three  sciences,  if  this  principle  is  disregarded. 

Utility  is  of  course  the  ultimate  personal 
purpose  of  all  human  activity,  and  it  is  the 
direct  objective  also  of  individualistic  and  social 
actions,  but  in  economic  activity  the  immediate 
purpose  is  not  utility,  but  the  abstract  com- 
mand over  utilities  produced  by  others,  and 
obtainable  by  the  production,  or  possession,  of 
utilities  desired  by  others.  But  what  we  have 
the  right  to  ask  of  Economics  is  not  the  mere 
statement  of  this  self-evident  fact,  but  the 
process  by  which  this  general  command  over 
utilities  can  be  acquired.  As  we  have  seen  al- 
ready, this  is  a  question  of  method,  and  investi- 


78      Enterprise  and  Production 

gation  makes  it  evident  that  there  is  only  one 
method  by  which  it  can  be  accomplished, 
namely  that  of  the  combined  activity  of  differ- 
ent individuals  under  the  stimulus  of  a  division 
of  the  purchasing  power  created,  pre-arranged 
in  accordance  with  the  productive  function  or 
functions  exercised  by  each.  It  is  in  the  study 
of  this  method,  the  only  one  by  which  purchas- 
ing power  can  be  created,  that  Economics  finds 
its  scope,  and  it  is  in  terms  of  this  method 
therefore  that  the  science  must  be  defined. 
Though  this  is  the  only  method  by  which  pur- 
chasing power  can  be  created,  it  is  not  the  only 
method  by  which  purchasing  power  can  be  ac- 
quired. The  transference  of  purchasing  power 
by  gift  or  theft  is  surely  not  an  economic  ac- 
tion, and  yet  it  must  be  so  considered  if 
Economics  is  defined  as  the  Science  of  the 
Power  to  Purchase,  as  gift  or  theft  transfer  the 
power.  So  if  we  are  to  preserve  any  distinc- 
tion at  all  between  individualistic  and  social 
actions,  and  economic  activities,  the  actions  of 
the  consumer  must  be  regarded  as  individual- 
istic, but  in  a  Science  of  Value  or  of  Exchange 
Value,  the  destruction  of  purchasing  power  has 
as  good  a  claim  to  a  place,  as  the  creation  of 
purchasing  power.  Again,  consumable  goods, 
and  even  some  kinds  of  "  fixed  capital  "  which 
have  passed  out  of  the  scope  of  Economics  into 


A  Definition  of  Economics      79 

the  hands  of  the  final  consumer,  or  into  posses- 
sion of  the  state,  have  not,  so  long  as  they  re- 
main in  existence,  lost  their  power  to  purchase, 
which  is  only  in  abeyance,  being  subject  to  a 
change  of  intention  on  the  part  of  their  pos- 
sessors ;  but  if  Economics  is  concerned  with 
the  power  to  purchase  in  all  of  its  aspects,  they 
should  not  be  excluded  from  its  scope  even 
during  the  interval  in  which  such  things  are  re- 
tained for  use  or  consumption  and  are  not  for 
sale.  To  utilise  "  exchange  value  "  or  "  value  " 
as  the  basic  idea  of  our  definition  of  the  science, 
we  must  therefore  limit  it  to  the  creation  of 
exchange  value,  which  is  practically  to  identify 
its  scope  with  that  of  our  definition,  which 
makes  Economics  the  study  of  the  only  method 
by  which  exchange  value  is  created.  But 
though  the  scope  of  the  two  definitions  is  the 
same,  the  difference  between  them  is  vital,  as 
has  already  been  shown. 

To  anyone  valuing  the  acquisition  of  know- 
ledge more  than  its  orderly  arrangement,  the 
point  just  made  may  appear  hypercritical.  They 
will  regard  it  as  of  minor  importance,  so  long  as 
Economics  has  to  consider  individual  and  social 
as  well  as  industrial  facts,  whether  the  science 
is  to  be  so  defined  as  to  include  the  exploita- 
tions of  all  these  classes  as  equally  primary,  or 
so  defined   and   construed    as   to   confine    its 


8o      Enterprise  and  Production 

primary  investigation  to  industrial  facts  alone, 
only  taking  individualistic  and  social  phenom. 
ena  into  consideration  as  data.  Economists, 
however,  are  perhaps  the  class  of  thinkers  least 
likely  to  subscribe  to  this  somewhat  bourgeois 
view,  as  they  of  all  men  recognise  that  facts  are 
of  little  or  no  scientific  value  until  placed  in 
their  proper  relations.  On  the  other  hand  they 
will  naturally  shrink  from  the  labour  involved 
in  the  reorganisation  of  theories  demanded  by 
my  definition  of  the  science,  if  it  is  accepted. 
This  definition  practically  confines  the  science 
to  the  study  of  industrial  laws  and  conditions, 
and  considers  social  and  individualistic  condi- 
tions and  activities  only  as  they  react  on  col- 
lective industry. 

A  very  casual  glance  over  the  historical 
development  of  Economics  makes  it  evident 
enough  that  economists  have,  to  a  considerable 
extent,  neglected  the  distinction  I  have  tried 
to  draw  between  the  primary  phenomena  and 
the  data  of  our  science.  Take,  for  instance,  the 
time-honoured  division  of  the  subject  into  laws 
of  production,  laws  of  distribution,  and  laws  of 
consumption.  It  would  be  hard  to  find  a  class 
of  human  action  more  purely  individualistic 
than  those  of  consumption.  It  has,  however, 
two  economic  bearings  upon  industry,  in  that 
it  is  the  efficient  cause  of  the  power  to  labour, 


A  Definition  of  Economics      Si 

and  in  that  the  character  of  the  demand  for 
consumption  has  a  potent  influence  upon  the 
character  of  industry,  the  kind  and  amount  of 
products  industry  will  furnish.  But  these  eco- 
nomic influences  of  consumption  are  only  the 
effect  of  the  laws  governing  consumption,  and 
not  the  laws  themselves.  The  Science  of  Eco- 
nomics, therefore,  cannot  include  the  laws  of 
consumption,  but  is  confined  to  utilising  the 
results  of  those  laws  as  data.  The  truth  of  this 
is  somewhat  curiously  illustrated  by  the  un- 
conscious habit  of  economists  of  neglecting, 
almost  entirely,  to  give  any  consideration  at  all 
to  the  investigation  of  laws  of  consumption, 
despite  the  prominence  given  those  laws  in 
their  formal  statements  of  the  scope  of  the 
science. 

Again,  if  we  consider  the  laws  of  production, 
many  of  them  are  physical,  and  as  Economics 
is  a  moral  science,  a  science,  that  is,  confined 
to  the  consideration  of  motives  and  their  effect, 
it  cannot  include  physical  laws  except  as  data. 
It  is  only  those  laws  of  production  that  are 
corollaries  of  the  manner  of  distribution  that 
come  within  the  scope  of  Economics,  because 
the  expected  distribution  of  the  product  is  the 
motive  which  leads  to  production.  Production 
and  distribution  are  not  separate  provinces  of 
the  science,  whose  full  scope  is  covered  by  pro- 


82      Enterprise  and  Production 

duction  as  affected  by  distribution,  and  dis- 
tribution as  affected  by  production.  This 
complementary  relation  of  production  and  dis- 
tribution has  been  noticed  and  commented 
upon  by  several  economists,  but  no  one,  to  my 
knowledge,  has  recognised  that  consumption  is 
primarily  individualistic. 

The  treatment  of  economic  theory  as  con- 
cerned with  a  certain  aspect  of  things,  instead 
of  as  concerned  with  a  certain  sharply  defined 
class  of  things,  is  largely  responsible  for  a  good 
deal  of  ambiguity  both  in  economic  concepts 
and  the  use  of  economic  terms.  Hardly  any 
two  economists  agree  exactly  in  their  concept 
of  such  fundamental  things  as  wealth,  capital, 
and  land — and  hardly  any  writer  is  consistent 
with  himself  in  the  use  of  any  of  these  terms. 
Take,  for  instance,  the  term  "  capital,"  used  in 
its  economic  sense ;  everyone  will  tell  you 
glibly  enough  that  it  is  wealth  employed  in 
production.  But  what  is  meant  by  this  reply? 
Every  one  is  famihar  with  the  old  controversy 
about  the  distinction  between  productive  and 
unproductive  labour,  and  productive  and  un- 
productive capital,  and  that  hardly  any  two 
disputants  drew  identically  the  same  line  of  dis- 
tinction between  them.  The  discussion  finally 
lapsed  into  innocuous  desuetude,  but  it  has 
never  been  settled.     Is  wealth,  in  the  hands  of 


A  Definition  of  Economics      83 

the  final  consumer,  capital?  Are  bank  notes 
capital?  Is  a  park  or  a  gas-plant,  owned  by 
the  city,  capital  ?  Is  the  capital  of  a  nation 
greater,  less  than,  or  equal  to  the  aggregate 
capital  of  the  individuals  composing  the  nation  ? 
Is  the  physical  power  of  the  labourer,  or  the 
mental  ability  of  the  educated  man,  capital  ? 
Is  an  idle  factory  capital?  And  if  not,  how 
long  must  it  remain  idle  and  unproductive  to 
cease  being  capital  ?  Or  is  it  capital  from  seven 
in  the  morning  until  noon,  and  from  one  until 
six,  and  not  capital  the  rest  of  the  time  ?  A 
child  can  ask  questions  which  a  wise  man  can- 
not solve,  but  any  one  possessed  of  a  precise 
capital  concept  should  be  able  to  answer  off- 
hand these  questions,  and  a  hundred  more  like 
them — but  surely  the  number  is  somewhat 
limited  of  those  who  would  exactly  agree  in  their 
replies  to  all  these  queries.  Have  we  not  been 
led  into  this  labyrinth  by  the  conception  of 
Economics  as  concerned  with  a  more  or  less 
vague  aspect  of  things,  rather  than  with  a  clearly 
defined  class  of  things  ?  In  the  first  place  there 
is  a  certain  vagueness  inherent  in  aspects.  They 
vary  in  degree,  that  is,  some  things  have  much 
more  of  the  aspect  than  others.  When  we  at- 
tempt to  bind  together  under  the  same  general 
laws  actions  primarily  economic,  but  capable  of 
producing  secondarily  individualistic  and  social 


84     Enterprise  and  Production 

effects,  and  actions  primarily  individualistic  and 
social,  but  capable  of  producing  retroactive 
economic  effects,  the  resulting  science  will  not 
be  pure  Economics.  Individual  activities,  so- 
cial activities,  and  industrial  activities  are  in- 
deed all  subject  to  certain  laws,  but  these  are 
the  laws  governing  the  wider  field  of  human 
activities  in  general.  It  is  the  body  of  laws 
peculiar  to  each  class  of  activities  that  forms 
the  theory  of  that  particular  kind  of  activity, 
and  the  moment  we  seek  to  extend  the  do- 
minion of  the  laws  of  one  class  over  the  ac- 
tivities of  another  class,  or  to  confine  the 
application  of  general  laws  to  one  species  of 
a  class,  uncertainties  and  misconceptions  arise. 
If  Economics  is  the  science  of  a  certain  aspect 
of  activities,  the  present  conception  of  capital 
as  a  purely  economic  term  is  correct.  When, 
however,  we  define  the  science  as  here  advo- 
cated, we  perceive  that  this  term  has  a  wider 
extent,  and  that  it  is  not  a  purely  economic 
term,  that  is,  that  there  is  individualistic  and 
social  as  well  as  economic  capital.  When  it  is 
clearly  recognised  that  capital  is  capable  of  in- 
dividualistic and  social  as  well  as  economic 
employment,  and  when  it  is  further  appre- 
hended that  it  is  only  a  subsidiary  productive 
factor,  a  productive  factor,  that  is,  in  a  different 
and    inferior    sense  to  that  of  enterprise,  all 


A  Definition  of  Economics      85 

these  ambiguities  are  readily  resolvable.  The 
concept  of  capital  will  be  alike  to  all  who  recog- 
nise the  validity  of  the  definition  of  Economics 
here  advanced,  with  its  corollary  concerning 
the  function  of  the  entrepreneur.  And  the 
same  is  true,  as  will  be  shown  later,  of  the  con- 
cepts of  "  land  **  and  "  labour,"  which  are  de- 
finitely settled  by  our  definition,  with  the  result 
of  exposing  the  inadequacy  of  the  present  con- 
cepts of  these  important  terms.  Land,  capital, 
and  labour  are  only  productive  factors  in  the 
sense  of  being  the  means  by  which  those  who 
assume  the  direction  and  responsibility  of  in- 
dustry carry  on  production.  The  entrepreneur 
or  enterpriser  is  the  only  real  productive  factor. 
Pure  rent,  pure  interest,  and  pure  wages  are 
what  the  enterpriser  has  to  pay  to  obtain  the 
privilege  of  controlling  and  utilising  these  three 
means.  Whatever  the  individual  enterpriser  pays 
over  these  amounts  is  paid  to  individual  land- 
lords, capitalists,  and  labourers,  not  as  landlords, 
capitalists,  and  labourers,  but  as  enterprisers 
and  as  sharers  with  him  of  the  responsibilities 
involved. 

One  of  those  who  criticised  the  Risk  The- 
ory of  Profit  advanced  the  objection  that  it 
founded  the  Science  of  Economics  entirely 
upon  functions.  This  is  perfectly  true,  not 
only  of  this  theory,  but  also  of  the  definition 


86      Enterprise  and  Production 

of  the  science  here  proposed.  He  said  that 
undoubtedly  a  science  could  be  constructed 
upon  this  basis,  but  that  he  saw  no  promise 
of  any  sufficient  gain  resulting  from  so  great  a 
departure  from  the  common  and  accepted  usage 
of  economists.  This  criticism  instead  of  being 
an  objection,  as  intended,  seemed  to  the  writer 
the  strongest  kind  of  an  endorsement  of  his 
views.  Though  they  have  not  been  equally 
consistent  in  their  use  of  the  terms,  economists 
have  universally  based  their  formal  distinctions 
between  the  three  productive  factors,  land, 
capital,  and  labour,  upon  function  and  function 
alone.  Unless  the  distinguishing  mark  of  the 
fourth  factor,  "enterprise,"  is  also  founded 
upon  function,  what  other  co-basic  idea  can 
exist  ?  All  economic  activity  has  of  course  the 
same  ultimate  motive,  namely,  "weal "  or  well- 
being,  but  the  sub-motives  governing  individ- 
uals will  of  course  vary  with  their  opportunities. 
The  owner  of  capital  will  naturally  act  differ- 
ently from  the  owner  of  land,  and  from  the 
owner  of  mental  or  physical  power,  and  from 
the  employer  of  land,  capital,  and  labour. 
Each  will  be  governed  by  the  character  of  the 
function  peculiar  to  the  productive  force  he  con- 
trols. And  if  any  individual  controls  two  or 
more  of  the  productive  factors,  his  control- 
ling motive  will  be  correspondingly  complex. 


A  Definition  of  Economics      Sy 

Surely  it  is  the  combination  and  interplay  of 
the  four  productive  forces  with  their  diverse 
functions,  when  they  are  differentiated  by  be- 
ing exercised  by  different  individuals,  which  is 
the  only  possible  subject-matter  of  Economics. 
Of  course  certain  forms  of  expression  lend 
themselves  to  the  corroboration  of  this  asser- 
tion of  my  critic,  such,  to  go  no  further,  as 
the  definition  of  Economics  as  the  science  of 
wealth — a  material  thing, — or  of  value,  which 
is  not  a  human  action  at  all  but  a  relation  be- 
tween things ;  or  the  use  of  the  terms  land, 
labour,  and  capital  as  productive,  whereas  it  is 
the  use  of  land,  the  use  of  labour,  and  the  use 
of  capital,  by  the  entrepreneur  as  means,  that 
can  only  be  possibly  so  denominated.  But 
however  loosely  economists  have  expressed 
themselves,  it  remains  true  that  all  that  has 
been  definitely  accomplished  has  resulted  from 
the  study  of  functions,  although  this  has  not 
always  been  distinctly  stated  or  recognised. 

There  will  naturally  be  a  good  deal  of  objec- 
tion to  the  conception  of  such  terms  as  wealth, 
capital,  land,  labour,  and  even  enterprise  being 
extended  beyond  the  bounds  of  Economics. 
This  is  however  made  necessary  by  our  defini- 
tion of  Economics,  and  I  hope  in  succeeding 
chapters  to  make  it  evident  that  such  confusion 
and  ambiguity  in  the  common  use  of  these  terms 


SS      Enterprise  and  Production 

as  still  remains  is  dissipated  when  they  are 
given  the  wider  application  here  claimed  for 
them.  It  is  to  be  noted  in  favour  of  the  defini- 
tion here  asserted  for  Economics,  that  the 
subject  of  inquiry,  remaining  within  the  scope 
defined,  includes  all  matters  of  practical  inter- 
est, and  will  afford  all  the  knowledge  ap- 
plicable to  the  affairs  of  industrial  life.  The 
inquiries  excluded  from  its  special  domain  are 
really  academic  to  economists,  and  consist  of 
the  wider  generalisations  inclusive  of  individ- 
ual and  social  as  well  as  economic  phenomena. 
These  wider  generalisations,  instead  of  being 
disparaged  by  their  exclusion,  are  really  ele- 
vated to  a  higher  plane,  and  must  become  both 
clearer  and  more  useful,  when  recognised  in 
their  wider  relations.  Our  analysis  has,  I  think, 
shown  beyond  question  that  industrial  activ- 
ities differ  so  radically  from  all  other  activities 
as  to  demand  a  separate  consideration,  which 
they  have  hardly  received,  because  they  have 
been  regarded  as  only  a  loosely  conceived  sub- 
group of  economic  activities. 

It  is  also  to  be  noted  in  favour  of  our  defini- 
tion of  Economics  that  it  is  the  only  one 
founded  on  a  principle  applicable  as  well 
to  the  definition  of  Individualism  and  Sociol- 
ogy, and  the  only  one  ever  proposed  which 
affords  a  means  of  clearly  distinguishing  these 


A  Definition  of  Economics      89 

three  classes  of  human  activity  from  each  other. 
That  the  unconscious  cerebration  of  the  race 
has  invariably  recognised  this  threefold  division 
of  human  actions  surely  affords  a  test,  to  which 
scientific  classification  must  conform  at  its  peril, 
and  that  the  proposed  definition  for  the  first 
time  enables  us  to  classify  accurately  all  voli- 
tional human  actions  seems  to  be  almost  a 
guarantee  of  its  validity. 


CHAPTER  V 

THE  INTENDED  LINE  OF  ARGUMENT 

RELYING  Upon  our  major  premise,  that  Eco- 
nomics is  the  study  of  that  class  of  human 
activities  in  which  there  is  a  combination  of 
different  individuals,  actuated  by  definite  and 
pre-arranged  personal  incentives,  we  will  come 
naturally  to  the  separation  of  our  general  class 
into  sub-classes  distinguished  from  each  other 
by  the  functions  performed,  which  four  func- 
tions constitute  the  minor  premises  of  our 
argument ;  that  is  we  must  subdivide  economic 
actions,  in  accordance  with  the  employment 
of  the  four  recognised  means  by  which  any 
individual,  acting  in  concert  with  other  individ- 
uals, can  command  a  pre-arranged  share  of  the 
purchasing  power  inherent  in  the  resulting  pro- 
duct. These  means,  or  functions,  are  indeed  in 
a  sense  discovered  by  observation,  but  by  ob- 
servation or  induction  both  limited  and  guided 
by  intuitive  perceptions  of  what  the  nature  and 
character  of  our  general  class  requires  them  to 
go 


Intended  Line  of  Argument    91 

be,  which  aid  to  observation  is  not  properly 
available  until  the  science  itself  is  positively 
defined.  These  functions  are  by  no  means 
peculiar  to  economic  activity.  On  the  contrary, 
as  we  have  seen,  they  are  just  as  essential  to 
individualistic  and  social,  but  it  is  only  in 
economic  activity  that  the  exercise  of  these 
functions  is  distributed  among  the  individuals, 
combining  their  efforts  in  production,  so  as 
to  differentiate  them  as  to  incentives  afforded. 
The  individual  acting  alone  exercises  all  the 
functions  brought  into  action,  but  does  not,  and 
indeed  cannot,  apportion  the  product  among 
them.  Individuals  combined  for  social  pur- 
poses may  each  exercise  a  distinct  function,  but 
there  is  no  proportionate  distribution  of  the 
resulting  product  by  which  the  reward  of  the 
contribution  of  each  is  measurable.  Conse- 
quently, as  in  individualistic  production,  there 
can  be  no  differentiation  in  the  incentives 
leading  to  the  exercise  of  different  functions. 
When  the  state  hires  labour,  rents  land,  and 
borrows  capital  the  labourers,  landlords,  and 
capitalists  do  differentiate  in  the  functions  they 
exercise,  and  consequently  their  action  is  eco- 
nomic. They  however  are  not  the  real  contri- 
butors to  a  social  result,  which  the  taxpayers 
are,  as  they  supply  the  purchasing  power  ex- 
pended  by  the   state   in   wages,  interest,   and 


92      Enterprise  and  Production 

rent.  There  is  no  distribution  of  purchasing 
power  created  but  only  a  distribution  of  pur- 
chasing power  contributed  by  others.  In  all 
such  cases  the  reward  of  enterprise,  the  func- 
tion assumed  by  the  state,  is  impersonal,  wholly 
unsusceptible  of  precise  distribution,  and  is  not 
therefore  differentiated  as  a  personal  motive  in 
the  sense  in  which  the  term  is  here  employed. 

How  the  industrial  action  of  individuals  is 
affected  by  any  complexity  of  motive  due  to 
their  income  being  composite,  is  an  interesting 
but  subtle  question  into  which  we  cannot  enter 
here.  As  a  rule  individuals  will  be  governed  in 
their  economic  activities  by  their  predominant 
interest,  and  that  they  will  be  so  governed  has 
to  be  assumed  in  any  theoretical  discussion. 
The  subordinate  interest  has  however  to  be 
taken  into  account  as  a  modifying  influence  in 
any  application  of  theory  to  practical  matters, 
whenever  it  is  not  so  insignificant  as  to  be  neg- 
ligible. This,  however,  is  a  necessity  of  par- 
ticular cases  and  subordinate  subjects,  rather 
than  in  the  discussion  of  fundamental  princi- 
ples in  which  the  individual  is  regarded  simply 
as  the  exerciser  of  a  single  function.  All  we 
have  a  right  to  expect  from  the  Science  of 
Economics  is  the  discovery  of  the  tendencies 
attributable  to  the  different  functions.  The 
resultant   of  these  tendencies,  when  they   are 


Intended  Line  of  Argument     93 

complex  and  do  not  pull  in  the  same  direction, 
is  a  matter  for  the  statistician  rather  than  the 
economist,  whenever  any  considerable  degree 
of  exactitude  is  required.  But  while  this  is 
essential  to  a  quantitative  result,  the  general 
direction  of  the  more  or  less  divergent  tenden- 
cies in  action  is  usually  evident  enough  without 
a  quantitative  analysis.  And  it  is  only  when 
the  tendencies  themselves  are  comprehended 
that  we  are  ordinarily  in  a  position  to  apply 
quantitative  analysis  with  much  expectation  of 
valuable  results. 

As  this  is  very  far  from  being  a  general  treat- 
ise on  Economics  I  do  not  feel  myself  under 
any  necessity  of  attempting  a  full  exposition  of 
any  of  my  headings.  The  purpose  here  is  sup- 
plementary, and  it  will  therefore  suffice  with  a 
few  exceptions  to  take  for  granted  the  reader's 
general  acquaintance  with  the  present  state  of 
the  Science,  and  to  avoid  so  far  as  possible  any 
restatement  of  accepted  definitions  and  theories. 
Attention  henceforth  will  be  given,  as  exclusive- 
ly as  possible,  to  some  modifications  of  accepted 
definitions  and  theories,  that  have  occurred  to 
the  writer  as  necessitated  by  his  Definition  of 
the  Science,  his  Theory  of  Profit,  and  the  Prin- 
ciples of  Classification  he  has  called  attention 
to.  Of  course  this  examination  of  economic 
theory  will  be  far  from  exhaustive  or  final,  but 


94      Enterprise  and  Production 

will  perhaps  serve  as  an  example,  however  im- 
perfect, of  the  kind  of  investigation  the  accept- 
ance of  the  author's  theories  will  naturally 
develop. 

As  a  landscape  changes  accordingly  as  it  is 
looked  at  from  different  eminences,  there  is  al- 
ways one  point  of  view  pre-eminently  fitted  for 
acquiring  an  idea  of  its  general  characteristics 
and  strategic  possibilities.  For  a  particular  sec- 
tion of  country,  this  point  would  naturally  be 
the  highest  and  most  central  eminence.  It  seems 
to  the  writer  that  the  function  of  Enterprise 
affords  the  point  of  view  from  which  the  general 
features  of  the  field  covered  by  Economics  can 
be  most  clearly  apprehended,  and  that  there  is 
a  strong  presumption  against  any  conflicting 
views  obtained  from  other  and  less  command- 
ing points.  This  presumption  indeed  becomes 
a  certainty  when  it  is  recognised  that  Economics 
is  a  moral  science,  which  is  to  say  that  it  is  a 
science  wholly  concerned  with  volitions,  and 
necessarily  therefore  founded  upon  motive. 
And  as  profit,  in  the  wide  sense  of  the  term,  is 
the  only  possible  determinant  of  volition.  Enter- 
prise is  the  source  of  all  economic  activity,  as 
well  as  of  all  individualistic  and  social  activities. 
The  direction  and  character  of  a  volitional  ac- 
tivity depends  primarily  upon  its  motive,  and 
only  incidentally  and  secondarily  upon  the  en- 


Intended  Line  of  Argument    95 

vironment.  The  environment  therefore  must 
be  regarded,  not  as  an  original,  but  only  as  a 
disturbing  cause,  or  rather  as  a  condition  ;  and 
we  must  first  duly  appreciate  the  original  cause 
before  we  can  consider  how  the  environment 
and  disturbing  influences  will  modify  results. 
That  every  human  activity  has  its  rise  in  the 
expectation  of  a  net  gain  uncertain  in  its 
amount  is  especially  important  to  Economics, 
because  in  economic  action  alone  the  function 
of  enterprise  is  assumed  by  a  distinct  class  of 
individuals,  and  thus  especially  differentiated 
from  the  other  productive  functions.  Unfor- 
tunately for  the  science,  however,  the  theory  of 
profit,  really  the  controlling  theory  to  which 
the  theories  of  rent,  interest,  and  wages  must 
all  conform,  has  been  the  last  theory  to  be  de- 
veloped, and  indeed  is  not  yet  developed  if  this 
attempt  be  adjudged  a  failure.  But  however 
this  may  be,  it  is  not  open  to  question  that  all 
theories  concerning  land,  capital,  and  labour,  and 
rent,  interest,  and  wages,  must  be  submitted  for 
their  final  verification  to  the  true  theory  of 
enterprise  and  profit,  when  that  shall  have  been 
obtained.  The  contrary  is  of  course  true,  but 
with  a  difference.  A  cause  must  agree  with  its 
effects  as  well  as  an  effect  with  its  cause,  and 
that  cannot  be  a  true  theory  of  profit  which  does 
not  agree  with,  explain,  and   verify   the  true 


9^       Enterprise  and  Production 

theories  of  rent,  interest,  and  wages.  The  point 
raised  here  is  that  profits  are  the  cause  of  rent, 
interest,  and  wages  and  that  rent,  interest,  and 
wages  are  not  the  causes  but  only  the  conditions 
of  profit,  and  that  therefore  we  cannot  have 
verified  theories  of  them,  until  we  have  an  un- 
disputed theory  of  profit  with  which  they  are 
in  agreement.  The  employer  pays  wages,  rent, 
and  interest  for  the  purpose  of  obtaining  a 
profit,  but  labourers,  landlords,  and  capitalists 
cannot  pay  the  employer  a  profit  for  the  pur- 
pose of  obtaining  rent,  interest,  and  wages,  be- 
cause they  do  not  pay  anything  to  him.  In 
other  words  they  look  to  him  for  their  remuner- 
ation,  while  he  does  not  look  to  them,  but  to 
the  final  consumer,  for  his.  Logically  therefore 
what  determines  their  remuneration  must  be 
found  in  the  uses  the  employer  has  for  them — 
whereas  what  determines  profit  is  not  the  use 
landlords,  capitalists,  and  labourers  have  for  the 
entrepreneur,  but  what  use  the  consumer  has 
for  him.  The  demand  for  consumption  comes 
of  course  from  landlords, capitalists,  and  labour- 
ers as  well  as  from  enterprisers,  but  it  does  not 
come  from  them  as  such,  but  as  individuals. 
Land,  capital,  and  labour  are  the  servants  of 
enterprise,  but  enterprise  in  its  turn  is  the  serv- 
ant of  the  whole  community.  While,  therefore, 
enterprise  is  dominant  over  the  other  productive 


Intended  Line  of  Argument    97 

factors,  using  them  as  means  for  the  attainment 
of  its  own  purpose,  it,  in  its  turn,  is  subservient 
to  the  whole  community,  and  dependent  upon 
the  demand  exerted  by  consumers  as  a  body  for 
the  realisation  of  its  expectations.  Only  such 
profits  are  realisable  as  the  demand  for  consump- 
tion allows.  The  amount  of  enterprisers'  risk 
variesof  course  with  the  amount  of  the  ownership 
they  are  obliged  to  assume.  When  that  amount 
is  increased  by  the  refusal  of  consumers  to  buy 
their  products,  prices  fall  and  profits  are  less- 
ened. When  their  incentive  to  production  is 
lessened  enterprisers  of  course  produce  less,  and 
as  established  standards  of  life  make  it  difficult 
for  consumers  to  restrict  consumption  to  the 
extent  in  which  production  has  declined,  the 
equilibrium  between  production  and  consump- 
tion is  finally  restored.  The  point  essential  to 
my  argument  is  this — that  the  remuneration  of 
enterprisers  depends,  both  primarily  and  ulti- 
mately, upon  their  relation  to  the  community 
as  a  whole,  while  the  remuneration  of  landlords, 
capitalists,  and  labourers  depends  primarily 
upon  their  relations  to  enterprise — upon  what 
their  employer  finds  it  to  his  advantage  to  pay 
them.  Ultimately  of  course  what  he  can  pay 
them  depends  upon  his  relation  to  his  employer 
— the  community — but  evidently  we  cannot  un- 
ravel their  relations,  if  we  insist  upon  putting  the 


98      Enterprise  and  Production 

four  productive  factors  on  the  same  level  and 
considering  them  all  as  mutually  employing  each 
other  or  as  directly  employed  by  the  comm  unity , 
which  seem  tobe  the  prevalent  ideas.  My  claimof 
dominance  for  enterprise  does  not  mean,  as  the 
Mercantilists  and  Physiocrats  apparently  as- 
sume, that  industrial  society  exists  for  the  bene- 
fit of  enterprisers  alone.  It  is  of  course  the  total 
annual  product,  and  not  the  portion  of  the  pro- 
duct which  can  be  regarded  as  a  surplus,  however 
the  term  surplus  may  be  defined,  which  is  the  ul- 
timate and  proper  aim  of  productive  endeavour. 
Neither  because  he  acts  under  the  direction  of 
another  is  the  furnisher  of  any  one  of  the  means 
of  production  less  necessary  than,  or  inferior  to, 
the  one  who  merely  assumes  the  responsibility. 
They  are  all  alike  members  of  the  community, 
each  worthy  of  his  just  proportion  of  the  total 
product  and  no  more — a  division  which  would 
be  assured  if  frictionless  competition  were  pos- 
sible; a  competition,  however,  not  of  class  with 
class,  but  between  the  individual  members  of 
each  class.  The  equal  standing  of  the  four  pro- 
ductive factors  in  this  sense  must  not  be  allowed 
to  obscure,  as  it  has  in  the  past,  the  immense 
scientific  importance  of  the  fact  that  the  com- 
munity as  a  whole,  although  equally  the  master 
of  all,  deals  directly  with  only  one  of  the  four 
productive  factors,  and  that  the  relation,  direct 


Intended  Line  of  Argument    99 

and  indirect,  of  the  four  factors  with  each  other 
and  with  the  community  cannot  be  understood 
when  this  fact  is  ignored  or  neglected  as  it  cer- 
tainly has  been  in  the  past  and  is  yet.  While  it 
is  absolutely  essential  to  the  continuance  of  in- 
dustrial activity  that  the  normal  rate  of  profit 
should  be  readily  obtainable  by  the  marginal 
enterpriser,  the  interest  of  the  community  lies — 
not  only  as  to  the  total  amount  produced,  but 
also  as  to  its  distribution — in  the  normal  rate  of 
profit  itself  being  low  and  the  average  rate  not 
too  much  above  the  normal. 

As  I  hope  to  show  later,  the  theory  of  profit 
here  advocated  sheds  some  light  upon,  and  leads 
to  some  considerable  amendment  of,  the  com- 
mon concepts  of  land,  capital,  and  labour,  and  of 
the  accepted  theories  of  rent,  interest,  and  wages, 
which  all  fail  somewhat  in  verification  when 
submitted  to  this  test.  The  view  of  the  economic 
phenomena  which  I  obtain  from  this  standpoint 
of  the  enterpriser,  a  standpoint  heretofore  in- 
accessible, should  of  course  be  more  accurate 
and  comprehensive  than  those  heretofore  held, 
and  if  it  fails  in  these  particulars,  I  cannot  but 
think  it  the  fault  of  the  camera,  rather  than  of 
the  point  of  view  selected. 

A  very  good  friend  who  is  also  a  distinguished 
economist  objects  to  my  adoption  of  Enterprise 
as  the  point  of  view,  saying  that  agriculture  is 


loo    Enterprise  and  Production 

the  proper  viewpoint  because  it  is  the  great  in- 
dustry of  mankind.  I  cannot  but  think  him 
wrong  in  this  and  that  the  underlying  idea  in- 
volved in  his  assertion  is  in  direct  contradiction 
to  the  true  method  of  scientific  investigation. 
Certainly  the  chemist  who  wishes  to  analyse  a 
mineral  does  not  look  around  for  a  mountain  of 
it,  but  for  the  purest  specimen  he  can  find.  And 
if  he  finds  the  mountain,  all  he  does  is  to  chip 
off  the  best  small  piece  he  sees  to  carry  home  to 
his  laboratory.  The  first  thing  he  does  then  is 
to  free  it  as  far  as  possible  from  all  impurities 
before  subjecting  it  to  one  chemical  reaction 
after  another.  We  cannot  treat  an  economic 
phenomenon  in  quite  this  way,  especially  as  to 
the  latter  or  experimental  part  of  the  chemist's 
process,  but  we  can  in  a  measure  imitate  him  in 
the  former,  or  process  of  isolation.  In  other 
words,  when  we  seek  examples  which  will  disclose 
to  us  the  nature  of  an  economic  function,  what 
we  should  look  for  is  one  in  which,  so  far  as  pos- 
sible, the  function  is  differentiated  or  isolated. 
The  farmer  is  manifestly  least  of  all  men  suited 
for  such  a  purpose  because  he  exercises  so  many 
of  the  industrial  functions  conjointly.  He  is  al- 
ways enterpriser,  labourer,  and  capitalist,  and 
often  owns  the  land  he  tills.  To  discriminate 
these  functions  we  should  select  some  such  ex- 
ample as  a  railroad  built  on  the  proceeds  of  its 


Intended  Line  of  Argament  loi 

bonds.  Here  the  bondholcltrs  are  the  capital- 
ists, though  as  they  also  assume  some  risk  they 
are  also  enterprisers,  and  such  part  of  their  in- 
come, less  any  final  loss,  that  is  in  excess  of  pure 
interest  on  their  investment,  is  profit.  The  share- 
holders however  are  enterprisers  pure  and  simple, 
and  anything  they  get  for  their  shares  or  in  divi- 
dends is  pure  profit  and  any  loss  they  have  finally 
to  make  good  to  the  bondholders  or  creditors 
of  the  road  is  a  pure  loss.  The  promoter  of  the 
company  in  the  first  place,  and  after  him  the 
president  and  directors,  are  the  co-ordinators 
or  captains  of  industry  or  mental  labourers,  while 
the  conductors,  brakemen,  etc.,  supply  the  ele- 
ment of  physical  labour,  and  the  owners  of  any 
franchises  enjoyed  and  of  such  lands  or  build- 
ings as  they  occupy  are  landlords.  This  ex- 
ample really  teaches  us  something,  whereas  the 
example  of  the  farmer  owning  his  farm,  despite 
there  being  so  many  of  them,  helps  us  not  at  all 
to  discriminate  between  the  industrial  functions. 

The  line  of  argument  herein  presented  may 
be  summarised  as  follows : 

First,  that  the  method  of  the  Moral  Sciences 
is  properly  deductive  because  they  are  concerned 
with  volitional  causes.  What  they  have  to  de- 
termine is  not  what  is  the  cause  of  a  given  ef- 
fect, but  what  will  be  the  effect  of  a  given  cause. 

Second,  that  the  definitions  of  a  Moral  Sci- 


102     Enterprise  and  Production 

eride  can  be  positively  obtained  only  by  a  de- 
ductive process,  applied  in  strict  accordance 
with  recognised  principles  of  classification,  or  in 
other  words  by  the  application  to  fundamentals 
of  what  is  generally  spoken  of  as  the  "  orthodox 
method." 

Third,  that  Economics  is  concerned  with  a 
distinct  class  of  volitional  activities,  and  that 
the  popularly  accepted  division  of  volitional 
activities  into  individualistic,  social,  and  eco- 
nomic is  well  founded  ;  and  that  the  principle 
of  division  between  them  is  to  be  found  in  meth- 
ods adopted  and  not  in  means  employed  or 
ends  sought ;  and  that  the  method  of  attaining 
ends  by  combinations  among  individuals,  each 
exercising  one  or  more  of  the  productive  func- 
tions under  the  stimulus  of  a  definitely  pre- 
arranged division  of  the  purchasing  power 
created,  is  the  distinguishing  mark  of  economic 
endeavour. 

Fourth,  that  Enterprise,  the  predominant 
productive  factor,  or  in  one  sense  the  only  pro- 
ductive factor,  the  others  being  means  em- 
ployed in  rather  than  causes  of  production,  is 
the  only  proper  standpoint,  as  being  their  real 
source,  from  which  economic  phenomena  can  be 
studied  ;  and  that  the  orderly  arrangement  of 
economic  theories  must  be  founded  upon  the 
Theory  of  Enterprise  as  their  basis — and    this 


Intended  Line  of  Argument  103 

despite  the  fact  that  the  community  is  best 
served  when  both  the  normal  and  average  rates 
of  profit  are  reduced  to  the  lowest  point  that 
will  insure  the  full  exercise  of  the  productive 
functions. 

Fifth,  such  modifications  of  the  prevailing 
conceptions  of  the  three  subordinate  factors 
as  are  necessitated  by  the  recognition  of  the 
principle  that  their  subordination  to  Enter- 
prise forces  us  to  distinguish  between  them 
by  the  peculiarity  of  each  in  their  relation  to 
Enterprise. 

Sixth,  the  statement  of  some  corollaries, 
more  or  less  divergent  from  the  present  views 
of  economists,  which  necessarily  follow  from  the 
above  principles,  in  conjunction  with  certain  ob- 
served facts  of  the  economic  environment,  to 
which  attention  will  be  called  as  the  occasion 
arises. 

This  presentation  of  my  argument  is  unfor- 
tunate in  this  respect,  that  it  brings  into  pro- 
minence and  emphasises,  perhaps  unduly,  the 
points  in  which  I  disagree  with  the  prevailing 
conceptions  of  economic  theory,  whereas  my 
sincere  desire  is  not  at  all  to  disparage  accepted 
theories,  but  only  to  add  my  mite  to  them  by 
developing  the  general  theory  of  the  science  a 
little  further  along  lines  of  thought  confessedly 
unpursued,  and  applicable  to  problems  confess- 


I04     Enterprise  and  Production 

edly  unsolved.  No  one  is  infallible  and  I  may 
be  wrong  in  some  of  my  conclusions,  but  it 
seems  to  me  at  least  that  my  attempt  is  along 
the  natural  lines  of  development,  and  in  accord- 
ance with  orthodox  methods. 

I  venture  to  hope  that  the  reader  of  general 
culture  will  be  able  to  follow  this  line  of  argu- 
ment as  well  as  the  professional  economist. 
Some  of  it  may  not  be  "easy  reading,"  due 
partly  to  the  subject  itself,  and  partly  to  my 
presentation  of  it;  but  the  difficulties  en- 
countered will  not  be  technical,  or  due,  as  has 
hitherto  necessarily  been  the  case  in  other  eco- 
nomic treatises,  to  ambiguity  in  the  meaning  of 
fundamental  terms.  The  reader  is  not  asked  to 
accept  my  content  of  these  terms  because  they 
are  the  final  result  of  my  careful  and  critical 
observation.  He  is  not  asked  to  look  at  the 
phenomena  through  my  eyes  or  through  any 
one's  else  eyes  but  his  own.  The  logical  process 
by  which  the  fundamental  concepts  here  arrived 
at  have  been  attained,  being  deductive,  is  as  in- 
evitable to  one  mind  as  to  another,  provided 
such  of  the  premises  as  have  been  obtained  by 
observation  and  induction  are  accepted  and  un- 
derstood. The  inductive  premises  employed,  at 
least  those  used  for  our  fundamental  concep- 
tions, are  not  the  result  of  my  observation  which 
I  ask  the  reader  to  accept,  but  of  the  general 


Intended  Line  of  Argument  105 

observations  of  the  race,  and  have  been  and  are 
accepted  generally  and  without  dissent.  Con- 
sequently I  make  no  appeal  to  the  personal  au- 
thority of  any  one,  however  distinguished  as  a 
thinker  and  economist  he  may  be.  And  no 
knowledge  of  economic  literature,  or  of  techni- 
cal terms,  is  essential  to  the  understanding  of  the 
argument  though  of  course  such  knowledge  will 
ease  the  reader's  way  and  give  him  quicker  com- 
prehension. The  few  inductive  premises  I  have 
utilised  being  accepted,  the  results  obtained 
are  positive,  and  as  positive  results  are  always 
comprehensible  to  any  one  who  will  go  to  the 
trouble  of  fully  understanding  them,  they  are 
never  so  incomprehensible,  or  so  suggestive  of 
doubt  and  hesitancy  or  confusion  of  mind,  as 
hypothetical  results,  however  great  their  proba- 
bility is.  Whatever  else  they  are,  the  funda- 
mental conceptions  to  which  our  train  of 
reasoning  leads  us  are  at  least  clear  cut  and 
free  from  ambiguity.  And  as  it  is  just  the  lack 
of  this  quality  in  prevalent  conceptions  which 
has  repelled  and  distracted  general  readers,  the 
author  is  not  without  hope  that  this  treatise  may 
attract  some  interest  and  attention  from  them, 
as  well  as  from  economists. 


CHAPTER  VI 

ENTERPRISE 

TO  such  of  my  readers  as  I  am  known  at  all, 
I  am  probably  best  known  as  the  promul- 
gator of  the  **  Risk  Theory  of  Profit."  This 
theory  asserts  that  the  profit  of  an  undertaking, 
or  the  residue  of  the  product  after  the  claims  of 
land,  capital,  and  labour  (furnished  by  others  or 
by  the  undertaker  himself)  are  satisfied,  is  not 
the  reward  of  management  or  co-ordination,  but 
of  the  risks  and  responsibilities  that  the  under- 
taker (usually  spoken  of  as  the  Entrepreneur, 
but  whom  I  prefer  to  designate  as  the  Enter- 
priser) subjects  himself  to.  And  as  no  one, 
as  a  matter  of  business,  subjects  himself  to  risk 
for  what  he  believes  the  actuarial  value  of  the 
risk  amounts  to — in  the  calculation  of  v^hich 
he  is  on  the  average  correct — a  net  income 
accrues  to  Enterprise,  as  a  whole,  equal  to  the 
difference  between  the  gains  derived  from 
undertakings,  and  the  actual  losses  incurred  in 
them.  This  net  income,  being  manifestly  an 
unpredetermined   residue,  must    be    a   profit, 

io6 


Enterprise  107 

and  as  there  cannot  be  two  unpredetermined 
residues  in  the  same  undertaking,  profit  is 
identified  with  the  reward  for  the  assumption 
of  responsibility,  especially,  though  not  exclu- 
sively, that  involved  in  ownership. 

While  it  has  been  freely  admitted  that,  in 
advancing  this  theory,  I  pointed  out  a  form  of 
income  radically  distinct  from  either  rent, 
interest,  or  wages,  and  while  no  one  has  ever 
denied  that  it  is  an  unpredetermined  residue, 
which  is  the  accepted  meaning  of  the  word 
**  profit,"  there  has  been,  and  perhaps  is  yet, 
some  hesitation  in  attributing  this  special  kind 
of  income  to  the  Entrepreneur  by  those  who 
persist  in  considering  him  solely  as  the  co- 
ordinator of  land,  capital,  and  labour.  This 
contention  will  be  considered  later  more  at 
length,  and  to  better  advantage.  It  is  enough 
to  remark  here  that  the  Entrepreneur,  being 
the  one  who  is  co-ordinated  for,  cannot  be 
the  co-ordinator  in  his  own  capacity,  though, 
of  course,  he  can  and  does  co-ordinate  for  him- 
self as  an  individual,  as  well  as  engages  agents 
to  co-ordinate  for  him. 

It  is,  of  course,  true  that  the  out-turn,  of 
responsibilities  assumed,  depends  upon  the  wis- 
dom and  good  fortune  with  which  they  are 
selected,  and  what  my  opponents  apparently 
contend  for  is  that  profit  must  be  considered 


io8     Enterprise  and  Production 

as  the  result  and  reward  of  prescience  and  good 
fortune,  and  not  of  the  actual  assumption  of 
responsibility.  They  regard  the  subjection  to 
responsibility  as  an  incident  of  management, 
while  my  theory  regards  management  as  in- 
cidental to  the  assumption  of  responsibility. 
They  seem  to  forget  two  things.  A  man  could 
accurately  divine  the  future  course  of  the 
market  for  wheat  or  cotton,  but  if  he  neglected 
to  operate  he  would  neither  make  a  profit  nor 
suffer  a  loss.  If  they  insist  that  management 
and  assumption  are  inseparable  they  have  no 
right  to  attribute  profit  to  management  and 
deny  it  to  assumption.  If,  on  the  other  hand, 
they  recognise  a  distinction  in  thought  be- 
tween the  two  terms — and  surely  there  is  such 
a  distinction — we  can  indeed  attribute  profit 
to  either  of  them,  but  in  different  senses.  We 
can  truly  say  that  profit  or  loss  inevitably  re- 
sults from  subjecting  ourselves  to  risks  and 
responsibilities,  and  this  assertion  remains  true 
whether  the  subjection  was  intended  or  unin- 
tended, whether  the  risk  was  managed  or  not. 
On  the  other  hand,  it  is  not  quite  accurate  to 
say  that  profit  is  the  result  of  wise  selection  or 
management.  There  is  an  ellipsis  here.  What 
is  meant  is  that  profit  is  the  result  of  risks 
wisely  selected.  We  cannot  indeed  assume 
responsibilities  without   first   determining   for 


Enterprise  109 

ourselves,  or  having  others  determine  for  us, 
what  responsibilities  are  to  be  assumed.  But 
it  is  only  when  intention  is  carried  out  that 
practical  results  follow.  It  is  the  action  and  i  \ 
not  the  decision  to  act  which  is  the  effective  \  I 
cause  of  the  result.  It  is  the  subjection  to  risk  ^ 
which  is  the  efficient  cause  of  the  results  of 
subjection.  The  question  between  the  two 
terms  is  really  settled  when  we  remember  that 
management  can  be  delegated  to  another,  to 
whom  a  wage  or  a  salary  is  paid,  but  we  cannot 
transfer  risk  without  transferring  also  the  lia- 
bility to  gain  or  lose  by  it.  When  we  say  that 
profit  is  the  reward  of  ability  in  the  exercise  of 
our  mental  powers,  we  mean  exactly  what 
could  be  said  of  physical  labour,  if  we  should 
affirm  that  wages  are  the  reward  of  the  intelli- 
gent direction  of  our  physical  efforts.  For  it  is 
evident  that  what  an  employer  will  pay  for  is 
only  such  physical  efforts  as  accomplish  what 
he  wants  done.  Wages  depend  then  wholly  on 
labour  being  so  directed.  We  can  therefore  say 
that  wages  are  the  result  of  the  wisdom  shown 
in  management.  And  if  the  first  assertion  / 
does  not  stand  in  the  way  of  our  regarding 
wages  as  the  reward  of  labour,  the  second  can- 
not stand  in  the  way  of  our  regarding  profit  as 
the  reward  for  subjecting  ourselves  to  risk  or  '  > 

responsibility.  ^  ^"^ 


no     Enterprise  and  Production 

The  second  thing  they  overlook  is  that  co- 
ordination, whether  we  regard  it  as  managing, 
selecting,  or  planning,  is  an  act  of  mental 
labour,  as  is  shown  more  fully  elsewhere,  and 
if  profit  is  its  reward,  profits  are  either  a  kind 
of  wages,  or  labour  earns  two  entirely  distinct 
kinds  of  reward. 

Others  profess  a  difficulty  in  accepting  the 
Risk  Theory  of  Profit  because,  as  it  is  capital 
which  is  risked,  they  assume  that  any  loss 
which  he  suffers  must  fall  upon  the  enterpriser 
jas  a  capitalist.  These  forget  that  it  is  a  physi- 
jcal  impossibility  for  any  one  but  its  actual 
ipossessor  to  risk  capital,  and  that  it  is  the 
entrepreneur,  and  not  the  capitalist,  who  is  in 
actual  possession  of  all  "  capital  goods."  That 
the  capitalist  at  the  time  he  made  his  loan  was 
able  to  exact  an  insurance  against  the  risk  to 
which  the  borrower  might  subject  his  capital 
was  due  to  the  fact  that  at  that  time  he  was 
its  actual  possessor,  or  in  other  words  as  an 
individual  he  was  then  both  capitalist  and 
enterpriser.  The  moment  his  capital  is  loaned 
he  parts  with  the  ownership  and  its  attendant 
risks  and  responsibilities. 

Others  have  objected  that,  as  risks  could  in 
some  instances  be  insured  against,  risk  was 
rewarded  by  the  premium  paid  and  was  there- 
fore a  predetermined  cost  and   not  an  unpre- 


Enterprise  1 1 1 

determined  residue  ;  the  answer  to  which  is,  of 
course,  that  the  reward  of  an  insurer  is  not 
the  premium  he  receives,  but  the  difference 
between  that  premium  and  the  loss  he  eventually 
suffers.  Insurance  is  a  cost  to  the  individual 
enterpriser  who  insures.  To  the  extent  in 
which  he  insures,  he  restricts  his  exercise  of 
his  function,  but  the  risk  is  merely  transferred 
to  the  insurer,  who  becomes  himself  an  enter- 
priser and  the  recipient  of  an  unpredetermined 
residue  by  accepting  it.  Moreover,  no  entre- 
preneur can  rid  himself  of  all  his  risks  without 
wholly  abdicating  his  special  function  in  pro- 
duction. The  greatest  responsibility  he  as- 
sumes, that  of  the  value  of  his  property 
fluctuating,  he  cannot  indeed  wholly  insure 
against,  but  can  only  end  it  by  parting  with 
the  thing  owned,  and  when  its  sale  is  effected, 
what  was  an  unpredetermined  residue  becomes 
a  realised  gain  or  loss,  determined  in  amount, 
and  the  previous  owner  has  ceased  to  exercise 
the  function  of  the  entrepreneur. 

Moreover,  the  objectors  to  the  Risk  Theory 
of  Profit  subject  themselves  to  the  necessity  of 
explaining  how  the  four  productive  factors  can 
obtain  five  fundamentally  different  kinds  of  in- 
come. They  are  barred  from  affirming  that 
one  of  the  factors  can  enjoy  two  kinds  of  in- 
come.    An    individual   can    indeed   obtain   all 


112     Enterprise  and  Production 

four  kinds,  but  that  is  because  he  can,  and 
sometimes  does,  exercise  all  the  productive 
functions.  But  if  the  productive  factors  are 
distinguished  only  by  the  nature  of  their  func- 
tions, as  is  the  case,  it  involves  a  contradiction 
of  terms  to  suppose  that  any  one  of  them  can 
obtain  two  or  more  fundamentally  different 
incomes,  because  the  difference  between  such 
incomes  is  dependent  upon  the  character  of 
the  functions  to  which  they  accrue. 

As  has  already  been  indicated.  Enterprise 
stands  on  a  different  footing  from,  and  above, 
the  other  productive  factors.  In  the  proper 
sense  of  the  term,  it  alone  is  productive,  the 
other  three  being  simply  forces  set  in  motion, 
or  released  forces — the  means  by  which  it 
creates  value.  The  question  naturally  arises 
as  to  whether  they  should  not  be  considered 
conditions  of,  rather  than  factors  in,  the  pro- 
ductive process.  The  answer  seems  to  be  that 
they  should  be  treated  wholly  as  means  rather 
than  causes  were  it  not  that  an  act  of  volition 
is  always  involved  both  in  their  creation  and 
activity.  While  the  enterpriser  is  the  only 
direct  creator  of  purchasing  power,  the  land- 
lord, capitalist,  and  labourer  are  each  volun- 
tary creators  of  a  condition  essential  to  his 
activity.  Appropriation,  saving,  and  the  ac- 
quisition   of    physical    or    mental     force    are 


Enterprise  113 

voluntary  acts  with  an  ultimate  purpose  of 
betterment,  or  the  acquisition  of  "  weal."  They 
are  not,  to  be  sure,  economic  actions  because 
they  are  individualistic  in  the  first  instance, 
but  an  element  of  individualistic  responsibility 
and  risk  and  therefore  of  enterprise  is  involved  in 
each  of  them.  More  than  this,  it  is  just  this  ele- 
ment of  individualistic  enterprise  which  makes 
them  creative.  The  volition  involved  brings 
them  within  the  field  of  the  Moral  Sciences, 
but  only  within  the  field  of  Economics  when 
the  result  of  the  separate  volitions  is  permitted 
by  their  owners  to  be  utilised  as  a  basis  for  com- 
bined industrial  activity,  with  a  pre-arranged 
division  of  the  value  to  be  created.  In  other 
words  it  is  their  voluntary  use  in  combination 
for  personal  purposes,  and  not  their  creation, 
which  is  strictly  economic. 

While,  therefore,  land,  capital,  and  labour 
stand  on  a  different  footing  from  enterprise, 
they  are,  it  seems  to  the  writer,  correctly  con- 
sidered to  be  subsidiary  productive  factors, 
and  as  economic  factors  when,  as  is  usually  the 
case,  land,  capital,  and  labour  forces  are  em- 
ployed by  the  enterpriser  with  the  consent  of 
their  owners  in  combined  production  with  a 
personal  purpose.  The  matter,  however,  is  of 
merely  academic  interest  to  my  argument,  as 
regarding  them  simply  as  means  or  conditions, 


114    Enterprise  and  Production 

and  enterprise  as  the  only  productive  factor, 
would  have  no  influence,  that  the  writer  has 
been  able  to  discover,  upon  the  development 
of  economic  theory,  beyond  perhaps  some 
verbal  changes.  Nobody  considers  the  owner 
of  the  spade  as  the  one  who  dug  the  ditch. 
Neither  would  the  owner  of  the  land — the  one 
who  furnished  the  opportunity  for  digging  the 
ditch — be  so  considered.  We  do  indeed  speak 
of  the  hired  labourer  as  the  digger.  We  also 
call  the  man  who  hired  him  the  digger  of  the 
ditch,  but  evidently  in  a  different  sense.  It  is 
the  latter  only  who  is  strictly  the  producer — 
the  hired  labourer,  like  the  capitalist  and  land- 
lord, only  furnishing  a  means. 

The  exigencies  of  the  discussion  have  led  us 
to  anticipate  somewhat  the  exposition  of  enter- 
prise and  profit.  It  may  be  well  however  to  note 
again  that  every  act  of  volition  connotes  and 
involves  enterprise.  We  cannot  act  at  all,  or 
even  think,  without  assuming  the  consequences, 
or  without  foregoing  the  doing  or  thinking  of 
something  else.  The  act  of  volition  involves  a 
more  or  less  conscious  preference,  a  balancing 
of  pro's  and  con's,  a  valuing  ;  and  the  weal  dif- 
ference between  what  is  done  and  what  might 
have  been  done  is  an  unpredetermined  residue 
— a  profit  or  a  loss  as  the  case  may  be — whether 
it  can  be  reckoned  in  dollars  and  cents,  as  in 


Enterprise  115 

economic  activity,  or  more  indefinitely  in  feel- 
ings, as  in  individualistic  and  social  activities. 

Although  it  may  seem  superfluous  after  what 
has  already  been  said,  it  may  be  well  here  again 
to  call  attention  to  the  economic  supremacy  and 
importance  of  the  Enterpriser.  He  bears  very 
much  the  same  relation  to  the  industrial  organ- 
ism that  the  will  does  to  the  body.  Perhaps 
his  relation  is  the  more  supreme  of  the  two,  be- 
cause the  body  industrial  has  no  reflex  system, 
by  means  of  which  it  can  continue  exercising  its 
functions  after  intelligent  direction  has  been 
withdrawn.  The  government  of  the  mind  over 
the  body  is  only  partial,  the  involuntary  and 
unconscious  activities,  so  far  as  we  know  at  least, 
not  being  subject  to  it,  whereas  all  weal-seeking 
is  voluntary,  and  consequently  every  human  ac- 
tivity, with  which  the  Moral  Sciences  are  con- 
cerned,comes  under  the  dominion  of  Enterprise. 
The  desire  for  a  change  cannot  arise  in  the  hu- 
man mind  except  as  a  corollary  of  a  desire  for 
betterment.  The  result  of  change  is  always 
an  uncertainty,  and  any  one  effecting  a  change, 
necessarily  subjects  himself  to  the  uncertainty 
involved,  and  assumes  the  responsibility  and 
risk  of  the  outcome,  so  far  as  he  himself  is 
affected  directly  or  indirectly  by  it.  The  result 
is  therefore  an  unpredetermined  residue^a  gain 
or  loss  as  the  case  eventuates.     Every  volitional 


ii6     Enterprise  and  Production 

causer  of  a  change,  whatsoever  the  nature  of  the 
change,  is  therefore  an  enterpriser  or  entrepre- 
neur, and  the  result  of  the  change,  less  its  cost, 
is  to  him  a  profit. 

,  Now  of  course  it  would  be  possible  for  us  to 
organise  our  knowledge  of  the  causes  leading  to 
>  human  activities  as  a  study  of  motive  in  general, 
and  call  that  science  Economics,  and  in  a  meas- 
ure that  is  what  has  unconsciously  been  done  in 
the  past,  and  is  yet  done  in  the  present  to  the 
extent  that  land,  labour,  capital,  and  enterprise 
are  yet  treated  as  exclusively  economic  terms. 
It  has  not  been  appreciated  that  this  usage  was 
in  direct  conflict  with  the  universally  accepted 
classification  of  human  activities  into  the  three- 
fold division  of  individualistic,  social,  and  eco- 
nomic. Unless  therefore  we  are  prepared  to 
abandon  this  popularly  accepted  classification 
of  human  actions,  we  must  seek  out  the  peculi- 
arity that  separates  economic  from  social  and 
individualistic  actions,  and  organise  the  Science 
of  Economics  about  the  resulting  definition  of 
economic  activities  as  distinguished  from  indi- 
vidualistic and  social. 

Now  as  Enterprise  is  the  initial,  dynamic,  and, 
strictly  speaking,  the  only  productive  force,  or 
factor,  we  will  naturally  expect  to  find  the  dis- 
tinction sought  for  in  the  motives  which  lead  to 
it.     The  motives  leading  to  the  acquisition  of 


Enterprise  1 1 7 

land,  or  other  opportunity,  are  affected  not  so 
much  in  kind  as  in  degree  by  their  intended  in- 
dividualistic, social,  or  economic  use.  And  the 
same  is  true  of  the  motives  leading  to  the  accu- 
mulation of  capital  and  the  building  up  of  the 
body  and  the  mind.  Of  course  the  desire  to^ 
accumulate,  acquire,  or  to  expand  our  physical 
and  mental  powers  is  intensified  according  to 
the  expected  degree  of  reward,  which  differs 
greatly  in  the  three  different  ways  of  acquiring' 
weal.  So  long  as  the  derived  benefits  are  equal, 
every  one  is  indifferent  to  the  use  to  which  the 
means  of  production  he  controls  are  put,  either 
by  himself  or  by  others,  whether  such  use  be  in- 
dividuahstic,  social,  or  economic.  Provided  he 
gets  the  same  rental  the  landlord  is  indifferent 
as  to  whether  the  tenant  proposes  to  live  ex- 
clusively on  what  his  own  labour  on  the  rented 
farm  will  yield,  or  whether  he  employs  other 
labour  and  sells  his  product,  or  whether  the  state 
is  the  occupant.  The  same  is  true  of  the  capi- 
talist; and  the  labourer,  as  his  employer  directs, 
will  either  aid  him  in  the  production  of  a  sal- 
able product,  or  perform  a  service  which  is  an 
individualistic  good  to  his  employer,  or  serve 
the  state  as  a  soldier  or  policeman. 

When  however  we  consider  Enterprise,  we 
find  the  inducements  to  individualistic,  social, 
and  economic   undertakings  different  in   kind 


ii8     Enterprise  and  Production 

as  well  as  in  degree.  This  is  patent  enough 
when  we  contrast  social  with  economic  enter- 
prise, or  individualistic  with  social  enterprise, 
but  it  is  perhaps  not  so  patent  when  individual- 
istic and  economic  enterprise  are  to  be  con- 
trasted. The  actuating  motives  of  both  these 
two  forms  of  activity  are  purely  and  directly  per- 
sonal, whereas  the  actuating  motives  of  the  indi- 
viduals composing  a  society  are  either  altruistic 
or  onlyindirectly  personal.  (The  difference,  how- 
ever, between  the  individualistic  and  the  eco- 
nomic motive,  as  they  are  both  personal,  might 
be  incorrectly  looked  upon  as  one  rather  of  de- 
gree than  of  kind.  7  Even  if  this  were  all  it  would 
suffice  some  persons,  perhaps,  as  a  ground  for 
distinction  between  them,  as  the  combination  of 
effort  peculiar  to  the  latter  so  greatly  increases 
productiveness.  But  it  is  not  all,  as  in  eco- 
nomic activity  there  is  a  differentiation  of  enter- 
prise which  is  a  difference  in  kind  rather  than 
in  degree.  That  is,  in  individualistic  enterprise, 
although  income  has  at  least  two  sources-  - 
namely,  labour  and  responsibility,  and  may  have 
four — it  is  yet  homogeneous  in  the  sense  that  it 
is  never  separated  into  its  component  parts. 
What  alone  interests  the  individual  producer  is 
the  total  product  per  unit  of  effort,  while  the 
economic  entrepreneur  cares  only  for  the 
amount  of  the  residue  and,  provided  this  is  un- 


Enterprise  119 

changed,  the  product  per  unit  of  effort  is  a  mat- 
ter of  indifference.  This  difference  in  motive  is 
one  in  kind,  and  not  in  degree,  and  this  differen- 
tiation of  enterprise  persists  in  all  economic  ac- 
tivity, no  matter  to  what  extent  the  income  of 
the  individual  enterpriser  becomes  composite 
through  his  being  landlord,  labourer,  and  capi- 
talist, as  well  as  employer.  The  fact  that  he  has 
to  prearrange  with  others  about  sharing  the  to- 
tal purchasing  power  to  be  created  forces  upon 
his  consideration  the  principles  upon  which  the 
division  must  be  made.  He  is  always  cognizant 
of  about  what  is  due  him  for  each  separate 
function  he  performs,  which  is  not  the  case, 
and  indeed  cannot  be  the  case,  as  to  purely 
individualistic  actions. 

The  practical  importance  of  understanding 
the  principles  underlying  the  combination  of 
efforts  under  the  stimulus  of  personal  interest 
lies  in  its  efficiency  to  produce.  On  the  one 
hand,  it  possesses  the  enormous  advantage 
over  individualistic  effort  yielded  by  combina- 
tion and  division  of  labour,  upon  which  there  is 
no  present  necessity  of  dilating  ;  and  on  the 
other  it  possesses  over  social  efforts  an  advan- 
tage, perhaps  in  most  instances  quite  as  great, 
due  to  the  greater  strength  of  personal  as  com- 
pared with  altruistic  or  social  motives.  These 
advantages,  although  resulting  in  an  enormous 


I20    Enterprise  and  Production 

economy  of  human  effort — whence  the  name  of 
the  science, — are  relative.  The  numerous  ser- 
vices, most  of  them  but  petty,  which  we  find  it 
less  trouble  to  perform  for  ourselves  ;  the  capital 
in  the  shape  of  consumable  goods  we  find  it 
handy  to  keep  within  sudden  call;  the  larger 
amount  of  *'  fixed  capital  "  such  as  dwellings  and 
household  furniture  owned  by  the  users  and  de- 
voted to  the  performance  of  services,  are,  on  the 
one  hand,  exceptions  to  the  general  rule  of  the 
greater  productiveness  of  economic  effort  over 
individualistic.  And,  on  the  other  hand,  the 
maintenance  of  law  and  order,  the  national  de- 
fense, and  other  social  needs,  are  exceptions  to 
the  superiority  in  strength  of  the  economic  over 
the  social  motive.  For  some  of  these  ends  the 
economic  process  is  wholly  inapplicable,  be- 
cause the  product  is  not  salable,  and  about 
these  there  is  no  question.  They  are  necessa- 
rily social.  Others,  the  product  of  which  is 
salable,  are  properly  delegated  to  society, 
when  the  amount  of  product  per  unit  of  effort, 
or  its  quality, — matters  of  indifference  to  the 
economic  entrepreneur, — are  of  great  social  im-y 
portance.  Under  this  heading  can  be  placed 
education  so  far  as  its  purpose  is  social,  and  the 
postal  system,  the  latter  chiefly  because  the 
private  entrepreneur  would  not  willingly  do  at 
a  loss  that  part  of  the  business  which  is  educa- 


Enterprise  121 

tive,  or  socially  advantageous,  such  as  the  car- 
riage of  printed  matter  below  the  cost  of  the 
service,  a  uniform  rate  for  all  distances,  and 
rural  delivery. 

How  far  social  should  be  substituted  for  eco- 
nomic control  in  the  production  of  public  utili- 
ties, and  the  exploitation  of  natural  monopo- 
lies, is  at  present  a  burning  question,  into 
which  we  cannot  enter  here,  further  than  to 
point  out  that  no  gain  in  the  amount  of 
purchasing  power  created  can  possibly  result. 
The  utmost  that  can  be  hoped  for  is  that  it 
will  be  as  great,  and  in  that  case  the  only 
direct  economic  gain  to  the  community  is  not 
in  income,  but  in  a  more  even  distribution. 
Disputants  seem  to  forget  that  the  receivers  of 
profits  and  monopoly  gains  are  members  of 
the  community.  Municipal  ownership  of  pub- 
lic utilities  that  merely  distributes  these  profits 
and  gains  in  lower  prices  to  the  consumer,  and 
higher  wages  to  the  employee,  adds  nothing  to 
the  aggregate  income  of  the  community.  And 
the  advocates  of  municipal  ownership  will 
hardly  win  their  case,  unless  they  recognise 
more  clearly  than  they  do  now  that  it  can 
never  be  expected  that  the  social  incentive  to 
combined  activity  will  be  as  effective  as  the 
personal,  and  that  some  loss  of  economic  in- 
come  must   always   follow  the   change.     The 


122     Enterprise  and  Production 

question  to  be  decided  for  each  individual  case 
must  always  be  whether  a  smaller  aggregate  of 
income  more  equally  distributed  is  better  or 
worse  than  a  larger  aggregate  more  unequally 
distributed,  and  whether  the  loss  in  exchange- 
able things  is  overbalanced  by  social  considera- 
tions, that  is  by  gains  in  results  that  have  no 
purchasing  power.  There  is  of  course  a  very 
considerable  social  gain  of  this  character  in 
equalising  distribution  in  that  the  marginal 
utility  of  a  large  income  is  less  than  the  margi- 
nal utility  of  a  smaller  income,  from  which  it 
results  that  the  expenditure  of  an  income  of 
$50,000  a  year  by  one  individual  would  yield 
a  much  smaller  aggregate  of  satisfaction  than 
the  expenditure  of  $5000  each  by  ten  individu- 
als. Thus  if  we  suppose  the  expenditure  of  the 
first  $5000  to  yield  ten  units  of  satisfaction, 
and  that  of  each  successive  $5000  to  decrease 
by  one  unit,  the  expenditure  of  the  whole  sum 
by  one  individual  would  yield  55  units  of 
satisfaction  against  100  units  of  satisfaction 
yielded  by  the  expenditure  of  the  same  sum  by 
ten  persons.  Another  element  modifying  this 
result  must  not,  however,  be  overlooked.  Just 
as  there  would  be  no  advantage  to  the  human 
body  in  diverting  blood  from  the  brain  to  some 
other  part  that  receives  only  one  tenth  as 
much  blood  as  the  brain,  so  there  would  result 


Enterprise  123 

a  loss  rather  than  a  gain  from  any  such  equali- 
sation of  income  as  would  deprive  the  more 
efficient  members  of  society  of  the  incentive 
to  the  utmost  exercise  of  their  productive 
power,  or  of  the  ability  to  fit  themselves  for, 
and  perform  successfully,  the  important  duties 
that  devolve  upon  them  as  the  undertakers  of 
enterprises,  the  discoverers  and  appropriators 
of  opportunities,  and  the  accumulators  of  capi- 
tal. To  resume  our  illustration,  we  cannot 
assume  that  the  marginal  utility  of  the  ex- 
penditure of  $5000  is  the  same  for  every  per- 
son, as  it  is  manifestly  greater  for  the  more 
important  members  of  society.  Thus  if  we 
suppose  that  the  expenditure  of  the  first  $5000 
by  one  of  these  yields  twenty  units  of  utility^ 
and  there  is  a  decrease  of  two  units  for  each 
additional  $5000  (by  no  means  an  improbable 
supposition),  the  expenditure  of  $50,000  by 
one  such  person  would  yield  no  units  of 
utility,  against  loo  units  when  a  like  expendi- 
ture is  divided  among  ten  persons  of  less 
industrial  and  social  importance. 

Every  economic  enterprise  has  indirect  eco- 
nomic, social,  and  individualistic  results,  incapa- 
ble of  appropriation  by  its  enterpriser,  and  from 
which  therefore  he  cannot  realise  a  profit.  Thus 
there  is  probably  not  a  bankrupt  railroad  in  the 
United  States  that  has  not  created  values  to 


124     Enterprise  and  Production 

several  times  its  cost.  The  community  has 
gained  from  it  a  great  deal  more  than  its 
builders  and  promoters  have  lost.  Whenever 
these  attendant  results  are  sufficiently  import- 
ant, the  state  wisely  exercises  its  police  power 
either  assuming,  encouraging,  regulating,  or  pro- 
hibiting the  enterprise.  It  often  happens  that 
the  economic  results  to  others  as  well  as  the 
social  and  moral — that  is  the  non-economic — 
results  to  society  of  a  given  enterprise  tran- 
scend in  importance  the  economic  results  to 
those  engaged  in  it,  in  which  case  the  state 
rightly  enough  lends  its  aid,  when  the  natural 
economic  inducements  are  insufficient  to  tempt 
enterprisers.  These  are  the  principles  upon 
which  the  justification  of  a  protective  policy,  or 
of  state  aid  to  railroads  and  other  internal  im- 
provements can  alone  be  based.  What  circum- 
stances make  it  wise  for  the  state,  instead  of 
lending  its  aid  to  the  enterprisers,  to  assume  the 
function  of  the  entrepreneur  itself,  is  a  matter 
we  cannot  enter  upon,  further  than  to  remark 
that  the  question  must  be  settled,  in  each  indi- 
vidual case,  mainly  by  the  proportion  which  the 
social  and  ethical  and  indirectly  economic  inter- 
ests involved  bear  to  the  directly  economic. 

Historically  considered,  the  influence  which, 
more  than  any  other,  debarred  the  economist 
from  an  appreciation  of  the  peculiar  theoretic 


Enterprise  125 

position  of  the  Enterpriser  or,  as  he  was  then 
called,  the  Entrepreneur,  was  the  almost  unques- 
tioned supremacy  during  so  many  years  of  the 
dogma  of  "  laissez  faire,"  founded  upon  the  as- 
sumption that  each  producer,  being  the  best 
judge  of  how  the  productive  factor  or  factors 
he  controlled  could  be  most  advantageously 
utilised  for  himself,  would  necessarily,  if  left  to 
his  own  initiative,  in  benefiting  himself  accom- 
plish also  what  was  best  for  the  community,  as 
the  good  of  the  community  was  merely  the  ag- 
gregate good  of  the  individuals  composing  it. 
This  theory,  with  the  important  limitation  that 
the  rights  of  others  must  not  be  infringed  upon, 
may  perhaps  be  allowed  to  stand,  if  its  appli- 
cation is  confined  to  individualistic  activities, 
as  in  them  the  unfettered  individual  does  con- 
trol the  direction  and  result  of  his  efforts,  or,  in 
other  words,  does  determine  the  character  and 
amount  of  his  products.  This  is  likewise  true 
of  social  activities,  but  is  inapplicable,  as  there 
is  no  force  outside  of  society  to  control  social 
activity,  as  society  can  and  does  interfere  with 
individualistic  and  economic  actions.  The 
understanding  of  Enterprise  we  have  now 
reached  unveils,  however,  the  falsity  of  the 
assumption  on  which  the  economic  dogma 
of  "laissez  faire"  is  based,  namely,  that  the 
controllers  of  the  three  subsidiary  productive 


126     Enterprise  and  Production 

factors  have  as  much  voice  as  enterprise  in  the 
direction  of  production,  whereas  the  truth  is 
that  they  have  no  influence  at  all  upon  it  as 
producers,  but  only  an  indirect  influence  as  con- 
sumers. Subject  to  the  limitation  that  he  must 
produce  what  consumers  will  pay  him  for  at  a 
remunerative  rate,  the  enterpriser  is  the  sole 
arbitrer  as  to  the  method  and  direction  of  pro- 
duction. The  landlord,  as  such,  has  nothing  at 
all  to  say  about  the  crops  that  the  renting  far- 
mer will  raise;  or  the  capitalist,  as  such,  about 
how  his  capital  shall  be  invested ;  or  the  labourer, 
as  such,  about  what  he  shall  work  at.  The  di- 
rection of  production — what  shall  be  produced, 
how  much  of  it,  and  by  what  methods — lies 
wholly  with  the  enterpriser,  who  will  allow  the 
landlords,  the  capitalists,  and  the  labourers  only 
what  prevailing  conditions  enforce.  The  land- 
lord can  indeed  select  his  tenant  from  those  will- 
ing to  rent  of  him;  the  capitalist  his  debtor 
from  those  wishing  to  borrow ;  and  the  labourer 
his  employer  from  those  in  search  of  hands, 
but  here  their  influence  over  the  course  of 
industry  ends.  What  shall  be  producedTS 
how  much  of  it,  and  by  what  methods,  or 
for  what  prices  it  shall  be  held,  does  not  de- 
pend at  all  upon  how  much  the  product  will 
yield  for  rentals,  interest,  and  wages,  but  upon 
the  expectation  of  what  will  remain  after  the 


Enterprise  127 

necessary  rents,  interest,  and  wages  are  paid. 
In  later  chapters  the  natural  consequences  of 
this  lack  of  coincidence  between  the  personal 
interests  of  enterprisers  and  those  of  the  con- 
trollers of  the  three  other  productive  factors 
will  be  further  developed,  and  they  will  be 
found  to  be  very  much  more  important  than  is 
generally  supposed.  It  is  enough  for  oui 
present  purposes  to  point  out  that  an  industry 
yielding  a  large  percentage  of  profit  to  enter- 
prise need  not  be  one  with  a  large  production 
"per  capita"  of  those  employed  in  it.  And 
yet  the  great  majority  of  economists,  from  Adam 
Smith  and  Mill  down,  are  accustomed  to  use 
''profitable  industry"  and  "productive  indus- 
try "  interchangeably  and  as  synonymous  terms. 
It  may  also  be  well  to  point  out  here,  and  at 
this  time  when  complaints  are  so  vociferous  that 
enterprise  is  absorbing  more  than  its  just  share 
of  the  total  product,  that,  judged  by  the  prin- 
ciple that  every  man  is  entitled  to  what  he  pro- 
duces, or  rather  to  what  he  contributes  to 
production,  it  is  really  the  most  underpaid 
function  of  all.  If  I  am  able  to  make  a  better 
use  of  a  product  than  its  owner,  do  I  fulfil  my 
moral  obligations  by  paying  him  for  it  all  it  is 
worth  to  him,  or  is  he  wronged  if  I  do  not  pay 
him  what  the  article  is  worth  to  me  ?  It  is  not  he 
but  I  who  must  be  regarded  as  the  creator  of  the 


128     Enterprise  and  Production 

additional  value  in  dispute.  The  difference  be- 
tween what  a  day's  labour  produces  when  aided 
by  capital,  opportunity,  and  enterprise  over 
what  the  same  day's  labour  could  produce  un- 
aided is  manifestly  created  by  capital,  oppor- 
tunity, and  enterprise,  and  on  the  principle  that 
every  man  is  entitled  to  just  what  he  produces, 
this  difference  can  not  belong  to  labour,  which 
really,  and  rightly,  gets  vastly  more  than  this 
principle  of  division  would  allow  it.  The  prin- 
ciple is  false — the  true  one  being  that  each  par- 
ticipant in  production  is  entitled  to  share  in  the 
product  in  proportion  to  the  sacrifice  he  has 
made,  the  sacrifice,  however,  not  of  pain  as  so 
generally  assumed,  but  of  purchasing  power — 
the  sacrifice  he  has  made  of  what  he  could  have 
obtained  instead,  if  he  had  otherwise  directed 
his  energies  ;  or  rather  this  represents  the  min- 
imum to  which  each  is  entitled.  When  the  sum 
of  the  minimums  is  less  than  the  value  of  the 
product,  the  difference  may  be  absorbed  by  any 
one  of  the  factors  without  injury  to  the  others. 
This  principle  is  evidently  a  just  one  unless 
unequal  customs,  or  unjust  laws,  have  unduly 
increased,  or  decreased,  what  any  one  of  the 
participants  is  able  to  exact,  as  compared  with 
his  proper  proportion.  To  the  extent  this  occurs 
its  operation  may  injure  the  working  man,  but 
as  a  matter  of  fact  all  such  injustices  suffered, 


Enterprise  129 

great  as  they  may  be  supposed  to  be,  take  away 
but  a  small  moiety  of  the  additions  to  wages 
directly  resulting,  not  from  anything  labour  does 
or  has  done,  but  from  the  existence  of  oppor- 
tunity, capital,  and  enterprise  created  by  others. 
As  an  individual  the  labourer  may  be  wronged 
to  the  extent  that  he  has  been  victimised  by 
monopoly,  but  simply  as  the  exerciser  of  the 
labour  function  he  hasbeen,  on  the  whole,  greatly 
benefited.  It  is  only  as  the  distribution  of  the 
product  has  been  affected  by  unjust  privilege 
that  the  labourers  have  any  valid  cause  of  com- 
plaint. The  refrainer  is  certainly  entitled  to  all 
the  pure  interest  he  obtains.  The  enterpriser 
likewise  is  entitled  to  a  profit  equal  not  only  to 
his  own  subjective  valuation  of  the  risks  and 
responsibilities  incurred,  but  to  one  almost 
equal  to  the  subjective  valuation  of  the  possible 
competitor,  who  has  just  been  deterred  from 
assuming  his  enterprise.  The  owner  of  an  ad- 
vantage, however,  has  no  moral  claim  at  all  to 
any  income  from  its  use  when  the  advantage  itself 
has  been  obtained  by  violence  or  fraud.  When, 
however,  the  violence  and  fraud  have  been  legal- 
ised, or  established  by  custom,  the  whole  com- 
munity is  to  blame,  and  cannot  "  come  to  court 
with  clean  hands"  seeking  redress,  especially 
when  the  opportunity,  wrongly  obtained  origin- 
ally,  has  come  into    the  possession   of  inno- 


I30    Enterprise  and  Production 

cent  third  parties.  To  what  extent  this  principle 
is  applicable,  and  how  it  and  the  other  legal 
principle  of  caveat  emptor  are  to  be  recon- 
ciled, are  moral  questions  lying  outside  the 
boundaries  of  our  present  investigation.  To 
the  extent  however  that  opportunities  are 
legitimately  appropriated,  the  title  to  them  is 
founded  either  upon  discovery,  or  upon  the 
special  ability  to  so  employ  them  as  to  add  more, 
or  at  least  as  much,  to  the  product  as  the  rent 
obtained  for  their  use  is  worth.  As  we  have 
seen,  the  discoverer  always  benefits  others  as 
well  as  himself,  and  the  private  ownership  of 
land  is  amply  justified,  if  under  it  the  land  is  so 
much  better  utilised  and  improved  that  the 
additional  product  obtained  is  greater  than  the 
rental  its  use  commands.  The  economic  right 
of  the  individual  to  legitimate  rentals  is  as  clear 
as  his  right  to  wages.  Just  however  as  indi- 
vidualistic rights  must  be  yielded  when  social 
needs  require  the  sacrifice,  as  occurs  when  con- 
scripts are  forced  to  fight  the  nation's  battles, 
so  opportunities,  however  legitimately  acquired, 
can  be  rightly  confiscated  when  society  judges 
the  discoverer  sufficiently  compensated,  or  that 
appropriations  have  ceased  to  produce,  in  the 
hands  of  individuals,  an  excess  over  what  they 
would  produce  if  socialised,  equal  to  the  rentals 
charged. 


Enterprise  131 

Even  the  isolated  savage,  living  without 
barter  and  entirely  on  the  proceeds  of  his  own 
labour,  betters  his  condition  considerably  by  the 
exercise  of  choice  in  his  occupations,  instead  of 
blindly  following  the  inclination  of  the  mo- 
ment. His  product  is  only  partly  the  fruit  of 
his  brute  force.  But  leaving  out  this  small 
element  of  enterprise,  it  is  evident  that  his 
income  can  be  increased  only  by  the  use  of 
capital,  the  acquisition  of  opportunities,  and 
the  increase  of  the  element  of  enterprise  which 
accompanies  the  use  of  opportunity  and  cap- 
ital. And  the  further  increase  of  income  due 
to  bartering  involves  a  further  increase  of 
enterprise  as  a  cause  of  income.  Everything, 
therefore,  that  a  hired  labourer  earns  beyond 
what  an  isolated  savage,  without  tools  or 
barter,  could  obtain,  is  made  possible  by  capi- 
tal, enterprise,  and  opportunity  (the  appropria- 
tion of  which  is  an  act  of  enterprise),  partly 
indeed  his  own,  but  mainly  contributed  by 
others.  Of  course,  nothing  can  be  produced 
without  labour,  but  that  is  a  very  different 
proposition  from  the  ignorant  assertion  that 
labour  produces  everything,  or  even  from  the 
hardly  less  ignorant  assertion  that  labour  and 
capital  jointly,  or  even  that  land,  labour, 
and  capital  jointly,  produce  everything.  The 
real    rule    of    equity  in    the    division    of   the 


132    Enterprise  and  Production 

product  is  that  it  shall  be  according  to  the  sac- 
rifice involved — not  the  sacrifice  of  pain  or 
effort,  but  the  sacrifice  of  giving  up  what  might 
have  been  acquired  instead — and  this  division 
is  necessarily  secured  by  free  competition,  with 
perhaps  the  possible  exception  of  gains  arising 
from  the  appropriation  of  some  special  oppor- 
tunities, the  effect  of  which  will  be  considered 
later.  It  is  enterprise  which  assumes  the  risk 
of  innovation,  and  consequently  all  advance  in 
civilisation  is  primarily  due  t9  it,  but,  as  Presi- 
dent Walker  has  so  clearly  demonstrated,  the 
benefits  of  civilisation,  after  yielding  tempo- 
rary tolls  to  enterpriser  and  capitalist,  finally 
go  entirely  to  the  consumer  and,  so  far  as  the 
labourer  is  a  consumer,  to  the  enlargement  of 
real  wages— a  benefit  to  which  the  labourer,  as 
such,  has  contributed  absolutely  nothing. 

It  has,  I  think,  been  an  almost  universal 
custom  among  economists  in  studying  the 
inter-relations  of  the  economic  forces,  to  treat 
these  inter-actions  of  land,  capital,  and  labour 
as  direct,  whereas,  owing  to  the  supremacy  of 
Enterprise,  their  inter-relations  are  always  in- 
direct only  ;  that  is  to  say,  any  change  in  land, 
capital,  or  labour  can  only  cause  the  neces- 
sary complementary  changes  in  the  other  sub- 
sidiary factors  indirectly,  through  its  effect 
upon  enterprise  and  profit ;  and  later  I  will  en- 


Enterprise  133 

deavour  to  show  some  such  inter-actions  which, 
from  the  neglect  of  this  principle,  have  escaped 
notice. 

Another  very  important  characteristic  of 
Enterprise  is  to  be  found  in  the  fact  that 
normal  profits  tend  to  appreciate  in  a  geomet- 
rical rather  than  an  arithmetical  progression, 
when  compared  with  the  degree  and  quantity 
of  risk  involved.  Provided  the  security  is 
thereby  unimpaired,  the  rate  of  interest  is  no 
larger  on  great,  than  on  small,  sums  loaned, 
unless,  of  course,  the  loan  is  so  large  as  to 
create  a  scarcity  of  loanable  funds,  and  then 
the  rise  is  in  the  general  rate  of  interest ;  and  a 
large  number  of  labourers  can  be  hired  at  the 
rate  of  one,  provided  the  demand  does  not 
press  upon  the  supply  of  a  special  kind  of 
labour,  and  then  the  advance  obtained  is  at  the 
expense  of  other  labourers,  or  of  a  general  rise 
in  wages.  But  individuals  will  only  be  tempted 
into  large  ventures  by  an  expected  rate  of 
profit  much  greater  than  will  induce  them  to 
put  a  small  portion  of  their  funds  into  ventures 
of  equal  risk,  and  they  will  even  venture  small 
sums  without  any  real  expectation  of  profit, 
that  is,  they  will  risk  a  small  amount  on  what 
they  know  to  be  an  even  chance,  for  the  mere 
excitement  of  the  thing,  as  is  seen  when  a  man 
takes  a  "  flier  **  with  funds  he  has  no  immediate 


134    Enterprise  and  Production 

use  for.  The  reason  for  this  will  be  at  once 
apparent  to  every  one  acquainted  with  the 
Austrian  theory  of  value,  and  need  not  be  di- 
lated upon  here,  further  than  to  call  attention 
to  the  fact  that  in  this  lies  the  secret,  not  only 
of  the  increase  of  corporate  effort  and  organisa- 
tion, but  also  of  the  more  rapid  industrial 
evolution  which  has  accompanied  it,  and  in 
great  part  been  caused  by  it.  Owing  to  this 
circumstance,  vast  fields  of  industry  have  been 
subjugated  by  corporate  effort,  that  individuals, 
or  even  co-partnerships,  would  never  have 
dared  to  enter. 

But  not  only  does  the  expected  rate  of 
profit,  and  therefore  on  the  average  the  rate 
of  net  profit  obtained,  expand  more  rapidly 
than  the  size  of  the  venture  increases — 
more  rapidly  than  the  quantity  of  the  ven- 
ture,— but  it  also  expands  more  rapidly  than 
the  degree  of  the  risk — more  rapidly  than  the 
quality  of  the  venture.  No  properly  constituted 
business  man,  just  satisfied  to  take  a  given 
risk  for  an  expected  profit  of  five  per  cent., 
would  consider  for  a  moment  a  venture  of  the 
same  amount,  which  he  regarded  as  just  twice 
as  risky,  for  a  profit  of  only  ten  per  cent.  How 
much  more  he  would  exact  would  depend  upon 
his  individual  temperament,  and  such  risks 
would  naturally  be  left  for  those  who  would  be 


V 


Enterprise  135 


satisfied  with  the  least  excess  over  ten  per 
cent.,  but  some  excess  would  be  a  sine  qua 
non  to  the  consideration  of  the  venture.  We 
have  here  a  case  in  which  national  and  indi- 
vidual interests  conflict.  It  is  to  the  interest 
of  the  nation  at  large  that,  other  things  being 
equal,  labour  and  capital  should  be  diverted 
from  industries  in  which  the  normal  rate  of  '-^A*^ 
profit^  is  small^o  those  in  whjcli-itJs_large,_as  ^^^^ 
is  naYvely  shown  in  the  common  statement  that 
the  wealth  of  a  successful  people  is  due  to  their 
progressiveness  and  enterprise,  which  is  really 
saying  that  it  is  due  to  their  willingness  to  en- 
gage in  novel  and  hazardous  undertakings. 
Doing  so  is  perhaps  more  a  matter  of  habit 
than  of  racial  characteristics,  and  it  is  quite 
within  reason  that  the  increased  diversity  of 
industry  due  to  a  policy  of  protecting  manu- 
factures by  an  agricultural  country  might 
effect  such  a  diversion,  to  the  perceptible  in- 
crease of  the  national  income,  as  to  whatever 
causes  it  is  due,  it  is  certainly  a  fact  that  the 
normal  rate  of  net  profit  in  manufacturing  and 
commerce  is  greater  than  the  normal  rate  in 
agriculture. 

There  is  a  connection  between  Enterprise  and 
Opportunity,  which  does  not  exist  between 
Enterprise  and  the  other  two  subsidiary  fac- 
tors, in  that    Enterprise   creates  Opportunity, 


136     Enterprise  and  Production 

but  can  do  nothing,  directly  at  least,  to  either 
the  creation  or  the  enlargement  of  Capital  or 
Labour.  The  appropriation  of  unoccupied  land  ; 
the  availing  oneself  of  a  neglected  opportunity, 
and  the  conversion  of  "  Circulating  '*  into 
"  Fixed  "  Capital,  are  all  acts  of  Enterprise,  and 
the  selling  value  of  the  land  and  the  capitalised 
value  of  previously  neglected  opportunities  and 
new  processes,  and  of  fixed  capital,  in  excess  of 
its  cost  in  circulating,  are  all,  in  the  first  in- 
stance profits.  And  it  is  entirely  in  the  cost 
to  the  enterpriser  of  creating  Opportunity  that 
the  field  for  investment  is  to  be  found,  except 
of  course  as  the  field  is  widened  by  any  circum- 
stance that  renders  it  possible  for  the  enter- 
prisers to  increase  the  aggregate  of  salable 
commodities  carried  in  process  and  in  stock, 
without  depressing  profits  below  the  normal 
expectation.  Of  course  the  field  for  profitable 
investment  can  be  contracted  as  well  as  ex- 
panded. Anything  which  increases  the  cost  of 
production  necessarily  decreases  demand  and 
makes  redundant  an  aggregate  of  capital  form- 
erly capable  of  profitable  employment.  Thus 
a  failure  of  the  crops  lessens  the  amount  of 
goods  which  can  be  profitably  carried  in  stock, 
and  entails  therefore  the  discharge  of  some 
artisans  and  the  idleness  of  some  fixed  capital. 
A  panic  likewise  by  curtailing  credit  and  incit- 


Enterprise  137 

ing  distrust  of  the  future  leads  to  frantic  efforts 
to  reduce  the  "  stock  in  trade "  carried  by 
middlemen.  In  both  cases,  despite  some  de- 
crease in  its  aggregate,  capital  cannot  be  as 
profitably  employed  as  before.  The  propor- 
tion of  capital  to  the  uses  enterprisers  have  for 
it  has  increased  despite  any  loss  of  capital  that 
has  occurred. 

The  activity  of  enterprisers  is  limited  in  its 
scope  by  the  means  of  which  they  must  avail 
themselves  to  produce  at  all.  These  means 
must,  however,  bear  a  certain  proportion  to 
each  other  to  be  available  to  them,  or  rather  the 
others  must  bear  a  certain  proportion  to  labour 
— the  most  inflexible  and  inelastic  of  the  three. 
It  is  beyond  the  power  of  enterprise  to  exploit 
opportunities,  or  to  utilise  the  savings  of  others, 
when  labour  is  lacking  or  too  expensive.  All 
the  enterpriser  can  do  is  to  make  the  most  of 
such  labour  forces  as  he  can  hire  at  prices  he 
can  afford  to  pay.  When  this  point  is  reached, 
he  has  no  use  for  further  advantages  unless 
they  are  better  than  those  previously  utilised, 
and  can  be  substituted  for  them.  Neither  has 
he  any  use  for  additional  capital,  and  this  mat- 
ter unfortunately  is  not  under  his  direct  control 
as  he  is  not  the  only  accumulator.  And,  even 
when  he  is  an  accumulator,  he  does  not  accum- 
ulate in  his  character  of  enterpriser,  but  as  an 


138     Enterprise  and  Production 

individual  consumer,  and  is  actuated  in  accum- 
ulating by  an  entirely  different  set  of  motives 
from  those  regulating  his  assumption  of  re- 
sponsibility, so  that  the  two  actions  are  entirely 
independent  of  each  other.  But  whoever  is 
the  accumulator,  he  is  forced  to  borrow  or  re- 
tain the  accumulation,  whether  he  wishes  to  or 
not,  as  the  actual  ownership  of  all  accumula- 
tions is  necessarily  his.  But  the  only  uses  the 
enterpriser  has  for  the  accumulations  forced 
upon  him,  is  to  invest  them  in  opportunities, 
or  to  allow  them  to  increase  his  goods  in  pro- 
cess and  the  stock  of  salable  commodities  he 
is  carrying.  The  first  of  these  uses  he  is  always 
anxious  to  avail  himself  of,  but  finds  himself 
limited  by  the  state  of  the  arts,  and  by  the 
extent  of  the  demand  for  the  consumable 
goods  that  would  result  from  the  employment 
of  the  additional  facilities.  The  latter  use, 
however,  he  persistently  avoids  so  far  as  he 
can,  as  his  constant  effort  is  to  reduce  his  stock 
of  goods  in  process  to  the  utmost  extent  that 
his  own  convenience  will  allow,  and  of  salable 
commodities  to  the  amount  which  the  conven- 
ience of  his  customers  demands,  and  for  which 
they  will  therefore  pay  a  price  that  will  recoup 
his  expense  of  carrying,  with  a  profit.  While, 
therefore,  in  a  new  and  undeveloped  country 
enterprise    may  be  circumscribed  by  want  of 


Enterprise  139 

capital  that  could  be  profitably  invested  in  the 
creation  of  opportunities,  it  cannot  anywhere 
occur  that  enterprisers  are  hampered  by  want 
of  capital  in  their  employment  of  labour.  It  is 
always  the  want  of  a  market  and  never  a  de- 
ficiency of  funds  to  pay  labour  that  restricts 
enterprise.  As  a  matter  of  fact  it  is  just  when 
the  aggregate  of  circulating  capital  is  the  least, 
and  the  stock  of  unsold  goods  the  smallest, 
that  the  most  labourers  are  employed  and  the 
aggregate  of  wages  is  the  largest. 

The  unfortunate  assumption  that  there  is  a 
direct  relation  between  capital  and  labour, 
responsible  for  the  ridiculous  assertion  that 
"  capital  employs  labour,"  is  the  cause  of  most 
of  the  prevailing  misconceptions  on  this  sub- 
ject. The  recognition  that  they  are  both  means, 
and  are  only  related  to  each  other  indirectly 
through  their  common  relation  to  enterprise, 
makes  the  matter  very  clear.  The  enterpriser, 
as  such,  employs  his  three  means  solely  for  the 
purpose  of  obtaining  a  profit,  the  amount  of 
which  is  regulated,  as  to  its  lower  limit,  by  his 
subjective  valuation  of  the  irksomeness  of  the 
responsibilities  he  has  to  assume.  He  will  not, 
therefore,  avail  himself  of  such  opportunities, 
or  hire  such  labour,  as  do  not  promise  him  a 
profit  which  he  regards  as  satisfactory.  As  to 
capital,  however,  enterprisers  as  a  body  are  dif- 


I40     Enterprise  and  Production 

ferently  situated  in  being  forced  to  borrow  and 
employ  it  whether  they  will  or  no.  The  only 
way  they  can  relieve  themselves,  and  restore 
the  rate  of  profit  to  a  satisfactory  basis,  is  to 
lessen  their  productive  activity,  until  the  rela- 
tive increase  of  consumption  has  depleted  cap- 
tal  to  a  point  of  equilibrium  with  labour  and 
opportunity,  at  which  its  employment  will  again 
yield  a  satisfactory  return. 

This  is  so  because  the  loss  of  value,  which  is 
due  to  declining  markets  or  to  any  other  cause, 
does  not  fall  primarily  upon  the  capitalist  but 
upon  the  enterpriser.  This  loss  is  always,  in 
time  of  business  distress,  much  greater  than 
pure  interest  and  cannot  therefore  be  made  up 
to  him  by  a  decline  in  the  rate  of  pure  interest, 
especially  as  such  a  decline  is  necessarily  coun- 
teracted in  whole  or  in  part  by  a  further  decline 
in  the  market  for  his  products  so  long  as  the 
stock  he  is  carrying  remains  unsalable  at  cost 
of  production,  so  that  practically  the  only  relief 
afforded  the  enterpriser  by  a  decline  in  the  rate 
of  interest  is  the  check  it  affords  to  accumula- 
tion— a  check  which  does  not  become  effective 
in  restoring  normal  profits  until  after  the  long 
interval  during  which  consumption  is  overtak- 
ing production,  and  reducing  the  aggregate 
of  capital  to  its  normal  proportions.  To  await 
this  adjustment  of  relations  by  a  decline  in  the 


Enterprise  141 

rate  of  interest,  the  only  one  now  recognised  as 
possible  by  economists,  would  spell  ruin  to  all 
enterprisers.  For,  as  long  as  production  and  ac- 
cumulation were  continued  at  the  old  rate,  the 
rate  of  interest  might  be  reduced  to  zero,  with- 
out causing  any  reduction  in  the  stock  of  com- 
modities unsalable  at  cost  of  reproduction. 
Fortunately  for  them  they  have  it  in  their 
power  to  hasten  the  re-adjustment  by  lessening 
their  employment  of  labour — which  the  more 
hardly  pressed  find  as  well  for  their  individual 
interest  as  for  the  advantage  of  their  class,  which 
latter  motive  indeed  need  not,  and  in  fact  does 
not,  influence  them  at  all.  Surely  no  observed 
facts  are  more  patent  than  that  it  is  when  profits 
are  low  that  employment  is  scarce,  and  that  low 
profits  are  always  the  result  of  an  accumulation 
of  goods  unsalable  at  the  cost  of  reproduction. 
The  claim  of  supremacy,  made  here  for 
enterprise,  is  a  matter  of  such  great  scientific  im- 
portance and,  if  misunderstood,  so  sure  to  arouse 
antagonism,  that  I  will  be  pardoned  for  com- 
menting further  upon  it,  even  at  the  cost  of  some 
repetition.  So  far  is  it  from  being  a  return  to  the 
discarded  ideas  of  the  Physiocrats  and  Mercantil- 
ists about  the  "surplus,"  that,  in  the  most  import- 
ant particular,  it  is  in  more  direct  opposition  to 
them,  than  the  prevailing  conception  of  the 
productive  process.     In  one  thing,  which  their 


142      Enterprise  and  Production 

successors  have  ignored,  these  ancient  eco- 
nomists were  right — namely  in  the  intuitive 
perception  that  the  expectation  of  a  net  gain 
resulting  is,  and  must  be,  the  determinant  of 
every  human  action,  and  the  ruling  and  decisive 
motive  to  all  volitional  activity.  The  mistake 
they  made  was  the  very  common  one  of  argu- 
ing as  if  the  profits  of  the  community — in  the 
sense  of  the  national  gain  from  industry — were 
merely  the  aggregate  of  the  economic  profits 
of  the  individuals  composing  it.  And  even 
here  they  stumbled  again,  confusing  savings 
with  profits.  As  an  individual's  annual  saving 
may  vary  greatly  from  the  amount  of  his  busi- 
ness gains  for  the  year,  so  the  annual  accumu- 
lation of  a  nation  is  no  indication  at  all  of  the 
gross  amount  of  its  economic  profits — if  for  no 
other  reason,  for  the  very  simple  one  that  there 
can  be  no  national  economic  profit  at  all,  be- 
cause the  nation  is  not,  and  cannot  be,  an  eco- 
nomic entrepreneur,  the  only  possible  recipient 
of  an  economic  profit.  The  savings  of  neither 
an  individual  nor  a  nation  can  act  as  an  incen. 
tive  to  further  production.  At  the  best  they 
are  only  a  means  that  can  be  utilised  for  that 
purpose.  The  inference  that  the  **  national  sur- 
plus "  was  the  final  end  and  object  of  all  indus- 
try was  not  only  ridiculous,  but  also  mischiev- 
ous in  the  inferences  drawn  from  it.     And  it 


Enterprise  143 

was  against  these  inferences  that  Adam  Smith 
and  his  followers  revolted.  But  these  infer- 
ences were  of  exactly  the  same  order  and  falsity 
as  one  which  still  prevails,  and  which  the  theory 
of  the  productive  process  I  have  advanced 
combats.  While  everybody  recognises  that  ac- 
cumulation is  not  an  end  in  itself  but  only  a 
means,  no  one  seems  to  have  perceived  that  as 
a  means  it  must  find  its  limitations,  not  in  the 
motive  that  leads  to  accumulation  by  the  mar- 
ginal accumulator — viz.,  in  the  rate  of  interest 
obtainable  for  it — but  in  the  uses  to  which  it 
"can  profitably  be  put  by  those  who  are  forced 
to  employ  it  whether  they  will  or  no.  As  the 
expectation  of  interest  is  not  the  only  motive 
leading  to  saving,  it  is  conceivable  that  exces- 
sive accumulation  might  occur  without  it.  Un- 
der such  circumstances — that  is  when  interest 
was  eliminated  as  a  cost — enterprisers  would 
still  surely  curtail  production  to  the  point  where 
the  ability  to  accumulate  would  be  restricted  to 
the  amount  that  enterprisers  could  find  a  use 
for  with  satisfactory  advantage  to  themselves. 
So  far  is  our  concept  of  the  productive  pro- 
cess from  viewing  the  "  surplus  "  as  the  measure 
of  a  nation's  prosperity,  that  it  holds  the  reverse 
of  this  proposition  to  be  in  a  sense  true,  and 
that  a  low  rate  of  interest  and  a  low  rate  of 
normal  profit  are  the  most  essential  conditions 


144     Enterprise  and  Production 

of  industrial  success.  If  the  accumulation  of 
capital  was  not  limited  by  the  uses  to  which  it 
could  be  put,  the  totality  of  the  product  would 
not  be  affected  by  the  rate  of  interest  being 
high  or  low,  but  as  it  is  so  limited,  the  lower 
the  rate  the  more  capital  enterprisers  can  find 
use  for.  As  to  profit,  the  lower  the  normal  rate 
the  greater  the  number  of  enterprises  business 
men  will  be  willing  to  undertake.  The  smaller 
the  share  of  the  product  that  contents  capital- 
ists and  enterprisers  the  greater  the  total  of  the 
product  will  be.  All  our  theory  contends  for  is 
that  if  the  normal  rate  of  profit  be  established, 
as  it  will  be,  by  the  seriousness  of  the  risks 
enterprisers  believe  to  be  involved,  it  is  during 
the  periods  when  the  rate  obtainable  is  above 
the  normal  that  we  enjoy  industrial  activity, 
and  when  profits  are  depressed  below  the  nor- 
mal we  suffer  from  industrial  stagnation.  When 
the  normal  rate  is  unobtainable,  industry  slack- 
ens, thus  lessening  the  ability  of  all  classes  as 
consumers  to  add  to  their  accumulations^  On 
the  other  hand,  when  profits  exceed  the  normal, 
two  readjusting  forces  are  released.  The  com- 
petition of  enterprisers  with  each  other  for  the 
means  of  production  becomes  keener  and  the 
accumulation  of  **  capital  goods'*  is  stimulated. 
Thus  it  comes  about  that  the  marginal  enter- 
priser, taking  one  period  with  another,  obtains 


Enterprise  145 

exactly  the  normal  rate  of  profit.  All  attempts 
of  the  other  classes  to  deprive  him  of  it,  and  all 
his  own  attempts  to  exceed  it,  put  in  motion 
self-acting  reactionary  forces  which  very  shortly 
restore  the  balance,  so  that  in  the  end  the  mar- 
ginal enterpriser  obtains  just  the  normal  rate 
and  no  more.  This  normal  rate  of  course  de- 
pends upon  the  subjective  valuation  which  he 
places  upon  the  irksomeness  of  the  responsibil- 
ities and  risks  he  will  be  forced  to  assume  if  he 
concludes  to  undertake  a  marginal  enterprise. 

A  similar  argument  as  to  the  average  rate  of 
profit  would  be  true  only  with  some  limitation. 
The  average  rate  of  profit  is,  of  course,  con- 
siderably greater  than  the  normal  or  marginal 
rate.  Other  things  being  equal,  it  would,  of 
course,  vary  with  it,  and  the  same  argument 
would  apply.  But  many  circumstances  can 
occur  which  will  increase  the  average  rate  with- 
out disturbing  the  normal,  at  least  to  a  cor- 
responding extent.  Thus  an  invention  that 
did  away  with  expensive  machinery  and  created 
an  additional  demand  for  labour  might,  if  very 
profitable,  raise  the  average  of  profit  while 
depressing  marginal  profits  below  the  previous 
normal,  in  which  case,  total  production  remain- 
ing the  same,  enterprise  would  receive  a 
larger  proportion  of  it  than  before.  New  and 
especially  successful  enterprises  must  raise  the 


146     Enterprise  and  Production 

average  of  profit  much  more  than  they  can 
affect  the  marginal  rate.  But  these  influences 
are  temporary  and  self-adjusting,  so  that  a 
fairly  constant  proportion  between  the  normal 
rate  of  profit  and  the  average  rate  undoubtedly 
obtains  in  the  long  run. 

It  will  doubtless  be  claimed  that  a  similar 
control  over  the  volume  of  industry  is  exerted 
by  the  subsidiary  factors — those  factors  which 
furnish  the  means  with  which  enterprisers  ac- 
complish their  purposes.  And  in  one  sense 
this  claim  is  valid,  and  m  it  the  other  classes 
could  find  a  way  of  protecting  themselves 
against  very  excessive  exploitations  by  enter- 
prise (the  result  of  any  combination  of  enter- 
prisers to  limit  competition  among  themselves). 
If  enterprisers  will  not  pay  a  satisfactory  rate 
of  interest,  capitalists  may  refuse  to  add  to 
their  accumulations.  If  they  will  not  pay  satis- 
factory wages,  labourers  cannot  indeed  long 
refuse  to  work,  for  they  must  have  the  where- 
withal to  support  life,  but  they  can  and  indeed 
must  lessen  their  consumption,  and  thus  keep 
the  stock  of  salable  goods  above  the  total  that 
allows  satisfactory  profits.  As  to  the  owners 
of  opportunities,  they  are  indeed  helpless  so 
far  as  opportunities  are  appropriations,  but  to 
the  extent  that  opportunities  are  not  found 
and  seized,  but  made,  they  can  refuse  to  con- 


Enterprise  14  7 

tinue  investing.  Enterprise  must  pay  those 
who  furnish  it  with  the  means  of  production 
sufficient  to  insure  the  continued  creation  of 
such  means  in  the  required  amount.  But  a 
more  careful  analysis  makes  it  evident  that  the 
analogy  between  the  two  kinds  of  control  will 
not  hold.  An  individualistic  workman  is  of 
course  limited,  in  the  amount  of  work  he  can 
accomplish,  by  the  character  of  the  tools  he 
works  with,  so  that  in  a  certain  sense  we  can 
affirm  that  what  he  will  produce  is  controlled 
by  the  tools  he  uses.  But  this  control  is  evi- 
dently of  a  very  different  character  from  that 
exercised  by  the  enterpriser  in  deciding  upon 
the  character  and  amount  of  what  he  will  pro- 
duce. It  is  control  only  in  the  sense  of  being 
a  limitation,  whereas  the  other  is  control  as 
well  in  the  sense  of  choice  and  direction.  The 
former  is  merely  negative,  the  latter  is  positive. 
There  is  a  difference  between  limiting  the  means 
and  controlling  the  use  of  means  furnished.  In 
economic  activity,  labour,  capital,  and  oppor- 
tunity are  merely  the  means  utilised  by  en- 
terprise in  production.  Production  is  indeed 
controlled  in  the  sense  of  being  limited  by 
what  the  enterpriser  can  find  to  utilise;  but 
what  direction  production  takes  and  its  amount 
is  controlled,  in  the  sense  of  being  determined, 
by  what  the  enterpriser  expects  will  be  left  to 


148    Enterprise  and  Production 

him  after  the  cost  of  production  is  satisfied. 
Thus  enterprise,  like  a  limited  monarchy,  is 
supreme  or  dominant,  but  not  independent. 
Its  will  is  law  within  the  limitations  that  it 
shall  not  impair  the  efficiency  of  the  means  it 
uses  to  accomplish  its  purposes.  Just  as  any 
monarch,  even  an  absolute  despot,  defeats  his 
own  purpose  of  self-aggrandisement  by  the  ex- 
ercise of  a  tyranny  that  ruins  his  subjects,  so 
enterprise  defeats  its  own  purpose  by  denying 
sufficient  remuneration  to  those  who  furnish 
it  with  the  means  essential  to  its  productive 
efficiency. 

The  acceptance  or  rejection  of  the  theory  of 
the  productive  process  here  advocated  will  de- 
pend upon  whether  the  uniqueness  claimed  for 
the  function  of  enterprise  is  acknowledged. 
In  the  present  conception  of  that  process,  the 
peculiarities  of  this  function  have  either  been 
largely  disregarded  or  considered  as  insufficient 
to  put  the  enterpriser  in  a  class  by  himself. 
The  author's  contention  is  that  this  violates 
the  principle  of  classification  that  the  various 
sub-classes  of  a  common  genus  shall  be  dif- 
ferentiated by  cognate  peculiarities.  Labour, 
capital,  and  opportunity  are  all  means  of 
production  utilised  by  the  enterpriser.  Is  en- 
terprise also  a  means  of  production  utilised  by 
the  enterpriser?     Defining  it  as  co-ordination 


Enterprise  149 

makes  it  such  a  means.  Defining  it  as  the 
assumption  of  responsibility  removes  it  from 
the  category  of  means  of  production.  A  means 
must  antedate  the  result — it  cannot  come  after 
it.  The  responsibilities  of  ownership  cannot 
arise  before  the  creation  and  appearance  of 
the  thing  owned.  Subjecting  oneself  to  these 
responsibilities  cannot  therefore  be  a  means 
employed  in  production,  but  is  only  a  condi- 
tion inseparably  attached  to  the  results  of  pro- 
duction. The  choice  of  what  conditions  he 
will  subject  himself  to  does  indeed  antedate 
the  product,  but  the  exercise  of  choice,  like 
every  other  exercise  of  the  mental  faculties,  is 
an  act  of  labour  and  does  not  of  itself  entitle 
the  chooser  to  the  residue  of  the  product. 
This  residue  is  neither  determined  nor  earned 
until  the  product  is  sold — until  all  the  risks  and 
responsibilities  have  been  undergone — whereas 
rent,  interest,  and  wages  are  predetermined 
in  amount  before  production  is  commenced 
and  at  the  moment  opportunity,  capital,  and 
labour  are  devoted  to  the  creation  of  any  par- 
ticular product.  It  is  evident  from  this  that  it 
IS  not  the  mere  exercise  of  choice  of  risks,  but 
the  actual  subjection  to  them,  that  entitles  the 
assumer  to  the  residue  of  the  product.  Enter- 
prise cannot  be  classed  among  the  means  of 
production,  though  it  is  a  member  of  the  wider 


150    Enterprise  and  Production 

class  of  sharers  in  the  results  of  production. 
These  sharers  are  properly  divided  into  two 
classes,  those  who  accept  the  conditions  at- 
tached to  the  results  of  production  and  those 
who  furnish  the  means  of  production.  And  as 
the  former  class  are  necessarily  those  who 
employ  the  means,  the  subsidiary  distinction 
between  means  must  be  made  with  reference 
to  the  use  to  which  they  are  put  by  those  who 
employ  them— which  is  to  say  that  oppor- 
tunity, capital,  and  labour  must  be  defined  in 
terms  of  their  relation  to  enterprise,  their 
employer.  This  granted,  as  it  surely  should 
be,  the  general  conception  of  the  productive 
process  here  taken  follows  as  a  matter  of 
course.  On  the  other  hand,  as  it  is  unanim- 
ously conceded  that  the  enterpriser  is  the  one 
who  employs  the  means  of  production,  it  would 
follow  that  if  enterprise  is  co-ordination  and 
therefore  a  means  of  production,  it  must  be 
defined  in  terms  of  its  relations  to  itself,  which 
is  a  logical  absurdity  really  involved  in  the 
present  conception  of  the  productive  process. 

It  must  not  be  overlooked  that  the  exercise 
of  the  function  of  enterprise  is  inseparable 
from  volitional  activity.  In  social  production 
we  are  all  joint  enterprisers.  And  in  individu- 
alistic production  every  one  is  an  enterpriser, 
though  not  an  economic  one.     The  workman 


Enterprise  1 5 1 

who  seeks  to  benefit  himself  by  a  change  of 
occupation  necessarily  takes  a  chance,  subjects 
himself  to  an  uncertainty,  and  assumes  a  re- 
sponsibility. It  is  the  expectation  of  benefits, 
uncertain  and  unpredetermined  in  amount,  that 
prompts  his  action.  This  change  of  employ- 
ment however,  being  a  purely  individualistic 
matter,  makes  him  only  an  individualistic 
enterpriser.  Employment  by  another  once 
accepted,  he  becomes  only  an  agent,  and,  as 
such,  no  longer  subjects  himself  to  the  results 
of  the  efforts  he  puts  forth,  under  the  direction 
and  at  the  risk  of  his  employer.  This  abnega- 
tion of  responsibility  is  a  benefit  to  the  labourer 
or  he  would  not  hire  out.  It  is  also  a  benefit 
to  his  employer  or  he  would  not  employ  labour- 
ers. The  interest  of  society  lies  of  course  in 
the  total  benefit  being  as  great  as  possible. 
Society  is  also  interested  that  the  division  of  the 
benefit,  between  the  two  classes  of  employees 
and  employers,  should  be  such  as  to  yield  the 
greatest  sum-total  of  utility.  It  does  not  follow 
from  this  that  the  income  of  the  individual 
employee  and  the  individual  employer  should 
be  so  adjusted  that  the  marginal  utility  of  each 
is  the  same.  Even  in  an  ideal,  that  is  in  a 
socially  perfect,  distribution  individual  incomes 
would  have  to  be  proportioned  in  accordance 
with  the  importance  of  the  functions  performed. 


152    Enterprise  and  Production 

Matters  being  as  they  are,  however,  it  is 
the  business  of  Economics  to  inform  us  of 
the  principles,  governing  the  division  of  the 
product,  resulting  from  the  transfer  of  respon- 
sibility to  the  shoulders  of  the  economic  enter- 
priser, and  surely  they  cannot  be  discerned  and 
formulated  when  the  patent  distinction  be- 
tween means  employed  to  produce  a  result 
and  the  inherent  conditions  attached  to  an 
accomplished  result  is  ignored. 

When  we  spoke  of  the  totality  of  the  product 
as  the  aim  of  individualistic  effort,  we  meant,  of 
course,  only  the  total  acquired  by  the  individual 
himself,  and  it  is  perfectly  possible,  as  is  recog- 
nised by  the  extremest  advocate  of  laissez- 
faire,  that  the  individual,  in  acquiring  the 
most  for  himself,  may  so  interfere  with  the 
opportunities  of  others  as  to  decrease  the  total 
product  of  the  community.  Likewise,  when 
we  speak  of  the  totality  of  the  product  as  the 
aim  of  social  effort,  we  mean  only  the  greatest 
amount  of  product  of  the  kind  the  state  elects 
to  have.  There  exists,  of  course,  no  guaranty 
that  the  state  will  act  wisely,  either  in  the 
selection  or  division  of  the  social  product,  or 
will  adopt  the  best  and  easiest  methods  of  pro- 
ducing it.  History  is  one  long  recital  of  the 
struggle  of  social  classes  to  influence  in  their 
own  favour  the  nature  and  division  of  the  social 


Enterprise  153 

product,  usually  to  the  waste  of  the  social  pro- 
duct itself.  The  results  of  neither  individual- 
istic, social,  or  economic  productivity  are  by 
any  means  ideal. 

The  Physiocrats  are  entitled  to  the  credit  of 
having  recognised  that  enterprise  is  the  dom- 
inant productive  factor,  and  that  the  other 
factors  are  under  its  direction.  But  they  mis- 
took the  content  of  the  term  in  reasoning  that 
because  enterprise  was  dominant  the  other 
productive  factors  existed  only  for  its  benefit, 
and  that  the  community  was  prosperous  in  the 
proportion  in  which  the  "  surplus  "  was  enhanced 
at  the  expense  of  wages  and  interest.  Adam 
Smith  and  his  immediate  followers  naturally 
revolted  at  this  proposition  and  its  corollaries, 
and,  as  is  usual  in  such  cases,  swung  the  pen- 
dulum too  far  in  the  other  direction  by  almost 
entirely  ignoring  enterprise,  and  by  promulgat- 
ing the  dogma  of  laissez-faire^  from  the  re- 
sults of  which  errors  economic  theory  has  not 
yet  wholly  recovered,  although  a  constantly 
growing  tendency  towards  the  repudiation  of 
laissez-faire  and  the  fuller  recognition  of  the 
function  of  enterprise  is  very  marked — a  tend- 
ency which  appears,  to  the  writer  at  least,  to 
culminate  naturally  in  the  view  of  the  produc- 
tive process  here  taken. 

Adam  Smith,  wishing  to  discard  the  domin- 


154    Enterprise  and  Production 

ance  of  enterprise  as  then  misunderstood,  and 
accomplishing  his  object  by  practically  ignoring 
enterprise,  paid  an  unconscious  tribute  to  its 
dominance,  rightly  understood,  by  treating  the 
science  as  a  study  of  three  productive  factors 
only — land,  capital,  and  labour, — passing  over 
without  any  proper  comment  or  attention  the 
fact  that  four  distinct  species  of  income  existed, 
one  of  which — namely  profit — was  unaccounted 
for.  And  the  habit  still  prevails  even  among 
economists  who  recognise  the  existence  of  the 
entrepreneur  as  a  fourth  factor.  A  very  casual 
acquaintance  with  economic  literature  will,  I 
am  sure,  convince  any  one  that  almost  invari- 
ably profit  is  either  treated  as  a  negligible 
quantity,  or  lumped  together  with  interest  as 
if  they  were  practically  homogeneous.  To  a 
certain  extent  this  usage  is  explained  by  the 
fact  that  enterprise  is  not  a  productive  factor 
in  the  same  sense  as  land,  labour,  and  capital. 
These  latter  are  prerequisites  or  means  to  the 
attainment  of  a  desired  end.  The  responsibility 
inseparable  from  ownership  is  a  consequent  of 
the  attainment  of  the  desired  end.  They  are 
the  means  by  which  a  product  is  obtained.  It 
is  an  irksome  condition  imposed  by  the  product 
having  been  obtained  and  being  retained.  This 
irksome  condition  being  exposure  to  the  risk 
of  a  loss,  no  one  will  subject  himself  to  it  unless 


Enterprise  i55 

the  chance  of  a  gain  is  greater  than  the  chance 
of  loss.  Necessarily,  therefore,  the  incentive  to 
subjecting  oneself  to  a  risk  must  be  an  un- 
predetermined  residue^  whereas  the  rewards  of 
land,  labour,  and  capital  are  predetermined  in 
amount.  Moreover  they  are  alwaj^s  positive, 
whereas  it  can  be  negative  as  well  as  positive. 
From  whatever  point  of  view  we  regard  enter- 
prise it  appears  as  belonging  to  a  different 
order  of  phenomena  from  land,  capital,  or 
labour.  And  the  same  is  true  of  profit  when 
compared  with  rent,  interest,  and  wages.  One 
sense  of  the  term  **  productive  factor  "  does  not 
include  enterprise.  In  another  and  truer  sense 
it  is  the  only  productive  factor.  The  instinct, 
therefore,  which  has  refused  to  regard  Eco- 
nomics as  a  study  of  the  interactions  of  four  co- 
equal factors  was  a  correct  one,  and  has  properly 
persisted  despite  the  attempt  to  formally  re- 
duce enterprise  to  the  plane  of  the  others,  by 
defining  the  entrepreneur  as  the  co-ordinator — 
for  co-ordination,  like  land,  capital,  and  labour, 
is  a  prerequisite  means  of  production.  But 
the  reward  of  a  prerequisite  must,  from  the 
nature  of  the  case,  be  predetermined.  This 
though  never  verbally  expressed  has  been  in- 
tuitively felt.  As  it  is  really  impossible  to 
attain  clearness  of  thought  or  expression  when 
enterprise  is  treated  as  the  co-equal  of  the  other 


iS6    Enterprise  and  Production 

factors,  economists  have  been  unconsciously 
forced  to  adopt  Adam  Smith's  method  of  prac- 
tically ignoring  enterprise  and  profit  in  their 
theories.  Any  one  who  takes  the  trouble  to 
investigate  the  literature  of  the  subject  will,  I 
think,  be  astonished  to  find  how  prevalent  this 
inadequate  treatment  of  economic  profit  is.  As 
a  matter  of  fact  profit  does  not  perhaps  get 
over  a  tenth  of  the  notice  given  to  interest, 
whereas  in  actual  importance  the  ratio  should 
be  just  the  other  way,  as  the  aggregate  of  net 
econamic  profits  is  probably  from  five  to  ten 
times  that  of  pure  interest. 

In  these  times  when  a  disposition  seems  to 
be  rapidly  developing  to  deprive  the  enterpriser 
of  a  part  of  his  gains,  whenever  his  ventures  turn 
out  more  favourably  than  was  expected,  it  is 
very  important  that  the  true  conception  of  the 
enterpriser,  and  his  function,  should  be  estab- 
lished in  the  popular  consciousness,  so  that  it 
will  be  readily  recognised  how  far  this  tend- 
ency is  legitimate  and  what  danger  there  is  of 
its  working,  not  only  an  injustice  to  enter- 
prisers, but  also  an  irreparable  injury  to  the 
community  in  the  attendant  discouragement 
of  enterprise. 

So  far  as  the  tendency  in  question  is  merely 
an  attack  upon  unjustly  appropriated  privi- 
leges, it  is  manifestly  morally  justifiable,  though 


Enterprise  i57 

it  does  not  follow  from  this  that  the  community 
would  be  acting  wisely  in  confiscating  such 
privileges,  though  well  within  its  rights  in  so  do- 
ing. The  community  often  gains  more  than 
it  loses  by  being  robbed  of  a  franchise.  The 
acquisition  of  the  franchise  for  a  tramway  on 
Broadway  was  an  exceptionally  gross  example 
of  political  corruption,  and  a  bare-faced  rob- 
bery of  the  citizens  of  New  York.  Never- 
theless, the  saving  of  time,  trouble,  and  ex- 
pense these  same  citizens  enjoyed,  between 
the  time  the  tramway  was  put  into  operation, 
and  the  time  an  honestly  acquired  franchise 
would  have  secured  a  similar  tramway,  was 
worth  vastly  more  to  them  than  the  value  of  the 
franchise  they  were  defrauded  of.  As  a  matter 
of  dollars  and  cents,  the  community  can  often  bet- 
ter afford  being  cheated  than  to  await  the  advent 
of  legitimate  enterprise.  This  of  itself  should 
not,  to  be  sure,  stand  in  the  way  of  the  com- 
munity recovering  what  it  was  robbed  of,  if 
that  can  be  accomplished  without  too  great 
disturbance  of  vested  interests  and  too  great 
discouragement  to  future  enterprises  of  like 
character. 

The  moral  aspects  of  the  case  differ,  how- 
ever, when  to  obtain  for  the  people  benefits  in- 
cidental to  the  establishment  of  public  utilities 
and  of  a  nature  the  enterprisers  cannot  retain 


158    Enterprise  and  Production 

for  themselves,  franchises  are  given  away,  or 
even  forced  upon  enterprisers,  by  adding  all 
sorts  of  inducements  to  their  acceptance  (as 
was  the  case  with  most  of  our  railroad  fran- 
chises, especially  the  transcontinental  lines). 
When  such  enterprises  turn  out  to  be  especially 
profitable  the  effort  to  tax  away  what  is  spoken 
of  as  the  "unearned  increment,"  simply  be- 
cause it  is  greater  than  was  expected,  is  bare- 
faced confiscation. 

A  public  service  franchise  is,  of  course,  ac- 
cepted in  the  first  place  subject  to  certain 
implied  duties  to  the  public  and  to  certain  limit- 
ations and  restrictions  of  the  common  law,  and 
so  long  as  these  are  not  avoided  the  original 
venturers,  or  their  representatives,  are  just  as 
much  entitled  to  the  whole  outcome  of  the 
venture,  whatever  it  turns  out  to  be,  as  the 
labourers  who  built  the  road  were  to  their 
wages.  That  very  unfortunate  term,  *'the 
unearned  increment,"  is  perhaps  more  responsi- 
ble than  any  other  for  the  more  unreasonable 
prejudices  of  the  unpropertied  classes,  who 
naturally  suppose  themselves  robbed  when  they 
are  told  that  a  large  proportion  of  the  income 
of  their  richer  neighbours  is  unearned.  A 
proper  understanding  of  the  function  of  the 
enterpriser  and  .the  nature  of  his  reward  shows 
us  at  once  that  such  a  thing  as  an  **  unearned 


Enterprise  159 

increment  **  of  legitimate  profit  never  did  and 
never  could  exist.  It  is  only  when  franchises 
are  wrongly  acquired  or  exploited  without 
regard  to  their  proper  limitations  that  there  is 
any  wrong  to  be  redressed. 


CHAPTER  VII 

OPPORTUNITY 

{HAVE  so  far,  with  some  necessary  exceptions, 
followed  the  common  practice  in  the  use  of 
the  term  "  land  "  as  denoting  the  first  subsidiary 
productive  factor,  although  I  regard  the  term 
as  singularly  inappropriate.  Other  monopolies 
existed  long  before  Adam  Smith,  but  he,  and 
others  since  his  time,  have  generally  treated 
the  incomes  arising  from  them  as  mere  trans- 
fers of  purchasing  power,  more  or  less  justifia- 
ble; whereas  the  monopolistic  income  arising 
from  land  was  considered  a  necessary  conse- 
quence of  the  nature  of  things.  The  distinction 
has  some  foundation,  but  its  logical  sufficiency 
for  the  application  made  of  it  is  more  doubtful. 
Certainly  monopoly  has  not  found  any  settled 
place  in  economic  theory  as  a  result  of  the 
distinction. 

A  gain  made  by  thieves,  gamblers,  or  specu- 
lators is  the  result  of  risks  assumed  and  is 
therefore  a  profit>  though  not  an  economic  one. 

i6o 


Opportunity  i6i 

To  the  losers  such  transfers  are  a  loss  conse- 
quent on  risks  and  responsibilities  they  sub- 
jected themselves  to.  The  transference  of 
value  involves  no  change  in  the  character  of  the 
income  gained  by  one  party  and  lost  by  the 
other.  To  each  it  is  an  item  of  their  indi- 
vidualistic profit  and  loss  account,  and  the 
general  aggregate  of  neither  profits,  interest,  or 
wages  is  directly  disturbed.  But,  as  profit  is 
the  only  form  of  income  which  can  have  a 
negative  as  well  as  a  positive  value,  a  similar 
transference  of  rent,  interest,  or  wages  to  another 
income  of  like  character  cannot  occur.  Any  trans- 
fer of  income  from  which  landlords,  capitalists, 
and  labourers  suffer  changes  its  character  into 
that  to  which  the  recipient  is  entitled.  And  any 
increment  they  enjoy  accrues  in  the  form  of  an 
increase  in  the  purchasing  power  of  rentals  to 
the  landlord,  of  interest  to  the  capitalist,  and 
of  wages  to  the  labourer,  but  is  obtained  in 
each  case,  as  it  happens,  at  the  expense,  in 
part  at  least,  of  other  forms  of  income  that 
would  otherwise  have  accrued  to  other  indi- 
viduals. The  aggregate  of  each  separate  form 
of  income  is  more  or  less  disturbed  therefore 
by  monopolistic  gains,  and,  on  this  score  alone, 
they  are  entitled  to  a  place  among  the  funda- 
mental forms  of  economic  income,  independ- 
ently of  the  fact,  which  further  insures  their 


1 62    Enterprise  and  Production 

position,  that  the  loss  of  purchasing  power 
to  the  sufferers  from  monopoly  is  rarely  the 
same  in  amount  as  the  gain  to  those  who 
are  benefited,  because  monopoly  powerfully 
affects  the  total  amount  produced — unfavour- 
ably when  privileges,  formerly  enjoyed  by  the 
losers,  are  taken  away  from  them,  and  favoura- 
bly when  the  advantage  monopolised  has  been 
newly  discovered,  and  appropriated  by  the 
monopolisers. 

Moreover,  monopoly  gains  are  subject  to 
influences  and  tendencies  radically  distinct 
from  those  affecting  wages,  interest,  or  profits, 
and  we  cannot  logically  assign  these  special 
"  laws  of  rent  "  to  any  place  in  the  orderly  ar- 
rangement of  economic  laws  if  we  deny  a 
place  among  the  productive  factors  to  mon- 
opoly, whether  embodied  in  land  or  in  a  plant, 
in  a  patent  or  other  right,  in  good-will  or  in 
secret  processes.  This  is  also  evident  a 
priori.  For  when  we  seek  the  definition  of 
monopoly,  in  accordance  with  the  principles  of 
deductive  classification,  in  its  relation  to  the 
predominant  productive  factor,  Enterprise,  we 
find  that  what  an  enterpriser  seeks  in  securing 
an  advantage,  or  special  facility  to  produce,  is 
a  competitive  relation — the  opportunity  of  ap- 
plying capital  and  labour  to  better  advantage. 
The   mere  control   of   capital    and    labour  is 


Opportunity  163 

as  advantageous  to  one  enterpriser  as  another, 
unless  one  of  them  has  a  better  opportunity,  or 
way,  of  exploiting  them.  Manifestly  what  an 
enterpriser  will  pay  for  this  better  way  is  sub- 
ject to  very  different  considerations  from  those 
determining  what  he  will  pay  for  the  control  of 
capital  or  labour. 

As  the  term  **  land  '*  is  altogether  too  limited 
for  our  purpose,  and  as  the  term  *'  monopoly  '* 
has  acquired  such  unfortunate  connotations, 
from  which  the  term  ** special  advantages"  is 
also  not  wholly  free,  I  now  venture  to  propose 
"  Opportunity  "  as  the  general  designation  of 
this  productive  factor.  Opportunity,  in  all 
cases,  is  first,  either  wholly  or  in  part,  obtained 
by  appropriation — that  is,  it  contains  an  ele- 
ment for  which  no  purchasing  power  has  been 
exchanged  or  sacrificed.  After  its  appropria- 
tion, it,  as  well  as  its  use,  is  of  course  usually 
exchangeable  (if  it  is  not  exchangeable  it  is 
either  a  personal,  or  a  social,  advantage,  and 
Economics  is  not  primarily  concerned  with  it), 
but  it  does  not  have  its  origin  wholly  in  sacri- 
fice, as  is  the  case  with  all  other  productive 
factors.  It  is  not  without  reason  that,  in  popu- 
lar speech,  opportunity  is  so  often  spoken  of 
as  "  seized,  "  Nevertheless  it  is  not  on  the 
score  of  its  origin,  that  opportunity  can  claim 
a  place  among  the  productive  factors.     This 


1 64    Enterprise  and  Production 

place  is  due  to  it  only  because  it  is  the  source 
of  a  peculiar  form  of  income  regulated  by  tend- 
encies governing  the  exercise  of  a  peculiar 
function.  As  opportunity  is  a  subsidiary 
productive  force,  the  distinction  between  it  and 
the  other  subsidiary  productive  forces  must 
be  found,  according  to  our  principles  of  classi- 
fication, in  their  relations  to  enterprise — the 
supreme  productive  force.  In  other  words, 
opportunity,  capital,  and  labour  must  be  dif- 
ferentiated accordingly  as  the  costs  to  the 
enterpriser  of  controlling  them  are  affected  by 
different  considerations.  Opportunity  must  be 
defined  as  including  everything  for  the  employ- 
ment of  which  a  rental  can  be  obtained  ;  Capi- 
tal as  including  everything  demanding  the 
payment  of  interest;  and  Labour  as  every- 
thing capable  of  earning  wages.  Or,  in  other 
words,  the  productive  factors  must  be  dif- 
ferentiated by  their  function  alone.  The 
present  usage  of  economists  is  exactly  the 
reverse  of  this :  looking  upon  land,  capital,  and 
labour  as  productive  factors  co-equal  with 
enterprise  they  have  naturally  defined  rent, 
interest,  and  wages  in  terms  of  land,  capital,  and 
labour,  instead  of  defining  land,  capital,  and 
labour  in  terms  of  rent,  interest,  and  wages, 
as  they  should  have  done,  because  the  character 
of  the   factor  is  strictly   determined    by   the 


Opportunity  165 

character  of  the  function  exercised.  They  have 
not,  indeed,  defined  profit  in  terms  of  the 
entrepreneur,  because  they  have  not  yet  suc- 
ceeded in  formulating  any  satisfactory  con- 
cept of  either,  but  their  attempts  have  been 
in  the  same  direction.  Instead  of  studying 
the  nature  of  profit  to  determine  the  function 
of  the  entrepreneur,  they  have  endeavoured  to 
divine  the  nature  of  profit  by  investigating 
the  characteristics  of  individual  entrepreneurs. 
Their  observations  indicated  that  management 
was  the  most  striking  characteristic  displayed 
by  the  individuals  who  employed  labourers, 
and  they  therefore  assumed  that  they  had 
established  this  by  an  inductive  process,  from 
which  it  followed  as  a  natural  deduction  that 
profit  was  the  result  and  reward  of  management 
or  co-ordination.  As,  however,  the  instances 
are  so  numerous  in  which  mere  management  is 
paid  by  salary  or  wages,  it  was  necessary  to 
substitute  another  term  for  it  which  would 
express  a  peculiar  kind  of  management,  which 
was  never  rewarded  by  salary  or  wages.  And  the 
term  "co-ordination"  has  been  pressed  into 
the  service.  I  will  be  pardoned  here  for  calling 
the  reader's  attention  to  this  specific  instance 
as  a  very  vivid  illustration  of  the  inapplicability 
of  the  inductive  method  to  the  definition  of 
fundamental  terms,  and  how  it  contrasts  with 


1 66    Enterprise  and  Production 

the  deductive  method  upon  which  the  argument 
of  this  treatise  depends.  It  is  indeed  true  that 
if  the  results  arrived  at  had  been  submitted  to  a 
very  rigid  verification,  their  falsity  would  have 
been  exposed.  When  the  attempt  had  been  made 
to  ascertain  the  exact  content  of  the  term  co- 
ordination its  insufficiency  would  have  become 
too  apparent,  for  the  reasons  elsewhere  stated. 
There  exists  of  course  a  possibility  that  as  a 
result  of  observations  long  enough  continued, 
and  their  apparent  results  one  after  another 
submitted  to  verification,  it  would  have  been 
discovered  that  the  cart  was  before  the  horse, 
and  that  the  entrepreneur  must  be  defined  in 
terms  of  profit — the  doer  in  terms  of  what  he 
does.  Observation  would  then  have  been 
directed  to  the  discovery  of  characteristics  of 
profit  which  would  serve  to  distinguish  the 
entrepreneur  from  the  other  productive  factors. 
This  task,  made  difficult  by  ignorance  of  the 
scope  of  the  science,  might  not  indeed  be 
wholly  impossible,  but  it  would  be  supremely 
difficult.  Until  this  scope  is  determined  we 
cannot  be  sure  just  what  an  economic  product 
is.  Neither  can  we  surely  discover,  by  observa- 
tion of  individual  instances,  how  it  is  divided 
among  producers,  so  long,  as  is  always  the 
case,  as  the  income  of  each  individual  producer 
is  composite.     Conceivably  of  course  the  truth 


Opportunity  167 

could  be  hit  upon  by  a  lucky  guess  and  after- 
wards verified,  but  to  trust  to  this  is  like 
expecting  to  find  a  needle  in  a  haystack.  Re- 
versing this  process,  as  I  have  ventured  to  do, 
would  seem  to  clear  up  at  least  two  dubious 
points  in  economic  theory. 

The  first  point  is  the  occasional  transmutation 
of  one  of  the  subsidiary  factors  into  another. 
Thus  if  land,  labour,  and  capital  are  primary, 
slaves  are  still  labour  force  ;  money  invested 
in  education  is  still  capital ;  all  improvements 
to  land  are  capital ;  and  the  net  return  for  the 
use  of  an  opportunity  created  by  an  investment 
is  profit.  Reversing  the  process,  however,  and 
taking  rent,  interest,  and  wages  as  the  funda- 
mental considerations,  it  is  at  once  perceived 
that  in  making  a  man  a  slave  he  is  changed 
from  an  element  of  labour  force  into  an  ele- 
ment of  "  fixed  capital."  Thereafter  instead  of 
earning  wages  for  himself,  he  earns  for  his 
owner  whatever  he  can  use  him  for  or  hire  him 
out  at.  His  economic  position  is  exactly  like 
that  of  a  domesticated  animal.  Again  the  re- 
turn for  money  spent  in  acquiring  an  education 
does  not  conform  to  the  laws  of  interest,  but 
does  appear  as  an  addition  to  wages  wholly  in- 
distinguishable from  other  wages.  Is  not  such 
an  investment  really  a  transformation  of  cap- 
ital into  labour   force,  undertaken,  like  other 


1 68    Enterprise  and  Production 

investments  of  capital,  in  the  belief  that  it  will 
yield  a  gain  (in  this  case  individualistic)  in 
being  more  productive  as  labour  force  than  as 
capital — worth  more  earning  wages  than  bear- 
ing interest  ? 

Secondly,  as  to  the  investment  of  capital  in 
fixed  forms,  especially  in  the  improvement  of 
real  estate,  the  question  is  somewhat  more 
complicated.  It  has  been  assumed  as  a  mat- 
ter of  course  that  all  such  investments  remain 
capital.  This,  however,  is  unquestionably 
erroneous  as  to  certain  kinds  of  real-estate  im- 
provement, such  for  instance  as  the  draining  of 
a  worthless  swamp,  or  the  filling  in  of  shallow 
waters.  The  land  thus  created,  exercising  the 
same  industrial  function,  will  yield  an  income 
absolutely  indistinguishable  from  that  of  other 
land,  and  its  rise  and  fall  in  value  will  coincide 
exactly  with  the  rise  and  fall  of  other  land 
similarly  situated.  While  this  will  be  readily 
granted,  it  will  perhaps  be  pointed  out  that 
the  reason  is  that  here  investors  have  availed 
themselves  of  special  opportunities,  which  they 
can  hardly  be  said  to  do  in  the  great  bulk  of 
real-estate  improvements,  as  the  amount  paid 
for  the  site,  or,  what  is  the  same  thing,  the 
ground  rent  exacted,  equalises  opportunity 
and  therefore  the  return  of  an  investment  in 
buildings  remains  subject   only   to   the    tend- 


Opportunity  169 

encies  regulating  interest.  But  when  we  care- 
fully examine  the  last  assertion,  we  find  that  it 
is  by  no  means  accurate.  Popular  usage  will 
help  us  out  here.  According  to  that,  interest 
is  paid  for  the  control  of  abstract  purchasing 
power.  Rent,  hire,  or  royalty  is  paid  for  the 
use  of  special  privileges  or  of  specific  things, 
which  are  to  be  returned  intact.  Now  why  do 
we  rent  or  hire  any  specific  thing,  whether  it  be 
a  farm,  a  dwelling,  or  a  horse  and  waggon,  or 
pay  royalty  to  a  patentee  ?  Is  it  not  because 
it  will  enable  us  to  utilise  capital  and  labour  to 
better  advantage  ?  When  any  builder  puts  up 
a  dwelling  is  he  not  really  endeavouring  to 
create  an  opportunity  for  the  use  of  which 
others  will  pay  him  ?  Upon  what  circumstance 
does  what  others  will  pay  him  for  this  use  de- 
pend? Is  it  not  upon  the  same  circumstance 
of  scarcity  upon  which  the  theory  of  agricul- 
tural rents  is  founded  ? 

The  rate  of  pure  interest  depends  upon  the 
scarcity  of  capital  as  a  whole,  as  compared 
with  the  demand  for  capital  as  a  whole.  The 
rent  of  anything  in  which  capital  has  been  in- 
vested depends  upon  the  scarcity  of  that  par- 
ticular class  of  things  to  which  it  belongs  as 
compared  with  the  use  of,  and  demand  for, 
that  class  of  things.  This  is  the  popular  dis- 
tinction   between    rent    and    interest.      Is    it 


170    Enterprise  and  Production 

possibly  the  proper  theoretic  distinction  also  ? 
Of  course  the  fact  that  certain  specific  classes 
of  things  can  be  more  readily  augmented  than 
others  causes  the  rent  of  such  a  class  to  ap- 
proach in  average  amount  the  interest  a  cor- 
responding loan  of  capital  would  yield.  But 
does  this  convert  rent  into  interest  ?  Granting, 
which  we  do  not,  that  such  a  view  could  be 
maintained  of  the  average  returns  of  absolutely 
safe  loans  and  of  real-estate  improvements,  it 
is  surely  not  true  of  the  temporary  fluctuations 
above  and  below  the  average,  which  will  mani- 
festly be  governed  by  the  laws  of  rent  for  all 
real-estate  improvements.  Certainly  no  logi- 
cian will  claim  that  the  two  amounts  belong  to 
the  same  class  because  their  average  tends 
towards  an  equality  when  the  fluctuations  of 
each  about  its  average  are  due  to  fundamen- 
tally different  causes.  If  a  scarcity  of  houses 
occurs  in  a  town  containing  a  superabundance 
of  good  vacant  lots,  the  rental  of  buildings  can 
advance  without  any  increase  of  ground  rentals 
occurring  or  any  rise  in  the  rate  of  interest. 
If  the  extra  demand  for  houses  is  known  to  be 
temporary,  capital  will  not  be  attracted,  and, 
while  the  extra  demand  lasts,  an  additional  in- 
come will  accrue  to  house-owners  that  is  clearly 
subject  to  the  laws  of  rent  and  not  to  those  of 
interest.     What  an  enterpriser,  hiring  a  house 


Opportunity  171 

or  store  under  these  conditions,  will  have  to 
pay,  is  surely  governed  by  the  laws  of  rent  and 
not  by  the  laws  determining  interest.  It  is  not 
a  valid  reply  to  this  argument  to  call  attention 
to  the  fact  that  the  value  of  all  commodities 
fluctuates  in  accordance  with  their  relative 
scarcity,  and  the  extra  gains  or  losses,  conse- 
quent on  the  relative  scarcity  of  commodities 
held  for  sale,  are  profits  and  losses  and  not 
rentals.  This  is  perfectly  true,  but  the  corre- 
sponding truth  is  that  the  extra  price  a  dwell- 
ing, factory,  or  store  would  sell  for  under  the 
supposed  circumstances  is  a  profit  and  not  a 
rental.  It  is  only  the  use  of  the  house  which 
it  is  here  contended  commands  a  true  rent,  just 
as  a  farm  near  a  growing  city  will  yield  a  profit 
on  the  investment  as  its  value  enhances,  while 
the  increase  in  rental  it  commands  remains  a 
true  rent. 

There  seems  therefore  to  be  solid  ground  for 
the  popular  distinction  between  rent  and  inter- 
est ;  but  if  economists  conform  to  this  usage,  as 
they  surely  should,  they  must  make  up  their 
minds  to  regard  capital  invested  in  the  improve- 
ment or  creation  of  opportunities — that  is  all 
'*  fixed  capital  "  and  all  "  real-estate  improve- 
ments " — as  transformed  into  the  productive 
factor  *'  opportunity  "  and  no  longer  capital,  at 
least  to  the  man  enjoying  their  use. 


172    Enterprise  and  Production 

The  tendency  recently  has  been  in  exactly 
the  opposite  direction,  namely  to  do  away  with 
land  and  all  other  forms  of  opportunity  as  pro- 
ductive factors,  the  argument  being  briefly  that, 
because  the  value  of  the  land  can  be  capitalised, 
the  income  arising  from  it  can  be  considered  as 
interest  on  the  value  of  the  investment,  and 
land  itself  as  only  a  special  form  of  capital.  Of 
course  anything  the  title  to  which  can  be  sold, 
agricultural  land  as  well  as  a  patent  right,  can 
have  its  value  expressed  in  terms  of  capital,  but 
not  on  this  account  will  the  income  arising  from 
the  specific  thing  in  question  conform  to  the 
tendencies  affecting  interest.  On  the  contrary 
the  tendencies  affecting  the  income  will  remain 
exactly  what  they  were  before.  Surely  what 
determines  the  nature  of  the  income-bearer  is 
the  character  of  the  income  yielded.  The 
thing  about  the  subsidiary  income-bearer  we 
are  chiefly  interested  in  theoretically  is  why  and 
how  much  the  enterpriser  must  pay  for  its  con- 
trol. And  so  long  as  what  the  enterpriser  pays 
for  special  opportunities  is  governed  in  its  fluc- 
tuations by  different  considerations  from  those 
controlling  what  he  pays  for  the  command  of 
purchasing  power  in  general,  merely  calculat- 
ing the  selling  value  of  land  or  other  special 
opportunities  in  no  way  changes  their  real 
character. 


Opportunity  1 73 

*  As  a  matter  of  fact  there  is  a  much  closer  re- 
semblance between  rent  and  profit  than  between 
rent  and  interest.  There  is  indeed  one  respect 
in  which  rent,  or  rather  a  certain  portion  of  rent 
received,  must  be  considered  profit.  And  this 
only  fails  to  identify  them  because  it  is  not  the 
pointof  view  or  aspect  from  which  combination 
in  production  under  personal  incentive  must  be 
considered  and  studied.  A  person  who  invests 
his  own  capital  in  any  form  of  opportunity  neces- 
sarily combine  the  two  functions  of  capitalist  and 
enterpriser.  This  is  very  clear  when  instead  of 
investing  his  own  capital  he  borrows  the  money 
for  that  purpose,  as  then  the  two  functions  are 
differentiated.  Interest  is  then  simply  a  prede- 
termined cost  to  the  mortgaged  landlord,  just 
as  it  is  to  any  other  enterpriser,  and  the  differ- 
ence between  the  outcome  of  the  investment 
and  its  cost  is  a  true  profit.  In  computing  this 
difference  one  would  naturally  subtract  the  cost 
from  the  selling  price  and  then  add  the  rentals 
received  and  subtract  the  interest  paid  during 
the  interval. 

But  the  sum  so  obtained  is  evidently  not  the 
predetermined  cost  to  the  enterpriser  who  rents, 
hires,  or  pays  royalties — or  even  the  sum  of  such 
costs  to  all  the  enterprisers  combined  who  paid 
for  the  use  of  the  specific  thing  in  question, 
not  even  when  the  hired  or  rented  thing  is 


174    Enterprise  and  Production 

entirely  used  up  (which  time,  in  the  case  of  land 
at  least,  never  arrives),  because  there  is  an  ele- 
ment of  profit  to  the  landlord  unaccounted  for. 
The  explanation  is  that  the  character  of  rent 
changes  in  passing  from  the  hands  of  the  payer 
to  those  of  the  receiver.  A  like  change  occurs 
in  the  passage  of  wages.  While  to  an  employer 
they  are  the  exact  economic  cost  to  him  of 
labour,  they  are  not  that  to  the  labourer  him- 
self, for  whether  we  consider  pain  or  sacrifice 
as  the  cost  to  the  labourer  of  the  labour  he  sells 
we  cannot  call  either  an  economic  cost.  What 
the  labour  costs  the  labourer  is  an  individualistic 
matter,  because  while  he  sells  the  result  of  his 
labour  to  another  he  does  not  buy  it  of  another 
but  creates  the  result  himself.  There  is  no 
combination  of  individuals  in  the  creation  of 
the  result,  as  the  combination  consists  in  the 
selling  and  not  in  the  creation  of  the  result.  If 
the  result  is  of  a  nature  which  the  labourer  can 
either  sell  or  consume  and  he  elects  to  consume 
it,  his  action  is  purely  individualistic.  If,  on 
the  other  hand,  the  labourer  sells  the  result  of 
his  effort  he  gets  either  more  or  less  than  he 
could  have  otherwise  obtained  by  a  like  ex- 
penditure of  effort,  and  this  loss  or  gain  is  to 
him  of  the  nature  of  profit,  but,  though  wages 
received  are  to  him  part  wages  and  part  profit, 
they  are  not  such,  but  only  wages,  to  the  man 
who  hires  him. 


Opportunity  i75 

How  the  landlord's  case  is  analogous  should 
now  be  plain.  The  fixed  capital  invested  in  is 
his  product  as  an  enterpriser,  but  his  with- 
drawal of  his  fixed  capital  from  the  market  is 
an  individualistic  act,  and  his  ownership  also 
individualistic  until  he  puts  it  again  on  the 
market,  when  it  becomes  economic.  To  be 
economic,  power  to  purchase  must  be  active, 
not  latent,  just  as  the  result  of  the  labourer's 
physical  or  mental  efforts  must  be  sold  to  be- 
come such.  Everything  held  for  a  market  is 
economic.  Anything  withheld  from  the  market 
in  order  that  it  may  be  used  as  a  facility  for 
production  is  not  while  so  held  an  economic 
quantity,  but  its  use  is  an  economic  quantity 
because  it  is  in  the  market.  Consequently 
Economics  cannot  go  behind  the  use  by  itself, 
but  must  rely  on  the  science  of  individuality 
for  any  further  analysis,  if  for  fuller  under- 
standing it  is  necessary  to  go  behind  the  use. 
The  definition  of  the  enterpriser  is  that  he  is 
the  utiliser  of  capital,  labour,  and  opportunity, 
without  being,  as  such,  the  owner  or  furnisher 
of  any  of  them,  though  he  is  the  owner  of  the 
product.  While  it  is  true  that  the  recipient  of 
rent  is  necessarily  an  enterpriser,  because  he 
owns  the  rented  article  which  is  his  product,  he 
is  the  furnisher  of  opportunity  to  some  other 
enterpriser,  or  if  to  himself  it  is  as  an  enter- 


176    Enterprise  and  Production 

priser  engaged  in  another  undertaking — that  is 
as  producing  something  else  than  the  oppor- 
tunity he  owns,  which  in  this  case  we  must 
regard  as  rented  to  himself,  just  as  we  regard 
every  individual  enterpriser  as  loaning  his  own 
capital  to  himself. 

What  the  user  of  an  opportunity  will  pay  for 
the  privilege  of  utilising  or  using  it  does  not 
depend  upon  the  cost  of  the  opportunity,  but 
upon  what  its  use  is  worth  to  him.  Neither 
does  the  worth  of  the  use  depend  upon  the 
capitalised  value  of  the  opportunity,  but  the 
capitalised  value  of  the  opportunity  depends 
upon  the  worth  of  the  use.  It  is  therefore  the 
worth  of  the  use  which  is  an  element  in  the 
"cost  of  the  product."  And  what  this  worth 
will  be  is  evidently  governed  by  considerations 
so  different  from  those  which  determine  inter- 
est and  from  those  which  determine  profit  and 
from  those  which  determine  wages,  that  rent 
must  hold  its  place  as  a  fundamental  form  of 
economic  income  clearly  distinguishable  from 
interest,  profit,  or  wages. 

Neither  can  the  force  of  this  argument  be 
broken  by  the  claim  that  the  capitalised  value 
of  an  investment  of  "  fixed  capital,"  though  it 
may  vary  to  almost  any  extent  from  the  value 
of  the  original  investment,  is  nevertheless  ar- 
rived at  by  a  discounting  of  the  expected  value 


Opportunity  177 

of  its  use,  so  that  the  selling  price  of  the  "  fixed 
capital"  will  equal  in  amount  a  capital  sum, 
yielding  an  equal  income  in  the  form  of  pure 
interest.  If  this  were  true  it  would  by  no 
means  prove  that  the  income  arising  from  an 
investment  was  of  the  nature  of  interest,  be- 
cause interest  is  a  percentage  of  the  original 
principal  that  varies  from  year  to  year  in 
obedience  only  to  the  supply  of  and  demand 
for  purchasing  power  in  general,  whereas  the 
annual  return  on  an  investment  is  exposed  to  a 
great  many  other  influences,  and  is  affected 
only  in  a  very  slight  degree  by  the  relative 
abundance  of  purchasing  power.  Consequently 
while  the  capitalised  value  of  a  loan  cannot 
change  from  a  change  in  the  going  rate  of 
interest,  the  capitalised  values  of  all  invest- 
ments are  not  only  affected  by  changes  in  the 
rate  of  interest  but  are  constantly  fluctuating 
from  influences  which  have  manifestly  nothing 
to  do  with  the  prevailing  rate  of  interest.  But 
it  is  not  even  true  that  the  capitalised  value  of 
an  investment  is  obtained  in  the  simple  way 
assumed.  Take  the  extreme  case  of  land  and 
if  we  find  it  selling  at  about  **  twenty  years* 
purchase,"  it  rents  for  about  five  per  cent,  of 
its  capitalised  value,  whereas  a  like  sum  of 
capital  will  command  only  about  two  per  cent. 
of  pure   interest.      Possibly  the   difference   is 


178     Enterprise  and  Production 

partly  explained  by  the  expected  expense  of 
taxes  and  repairs.  But  it  is  not  wholly  so  ex- 
plained, as  no  investment  of  capital  is  ever 
made  without  an  inducement,  and  this  induce- 
ment, whatever  form  it  takes,  is  always  the 
expectation,  justified  on  the  average  and  in 
the  long  run,  of  getting  more  income  from  in- 
vesting capital  than  from  loaning  it.  In  other 
words  the  capitalised  value  of  land,  or  of  fixed 
capital  in  any  form,  is  expected  to  earn  a  profit 
as  well  as  pure  interest.  And  the  same  is  of 
course  true  of  an  investment  of  capital  in  sale- 
able commodities,  which  also  have  a  capitalised 
value  varying  from  day  to  day  as  the  market 
fluctuates,  though  so  far  as  I  am  aware  no  one 
has  ever  claimed  that  the  net  gain  arising  from 
holding  such  commodities  for  a  market  was  of 
the  nature  of  interest,  though  it  is  commonly 
but  erroneously  held  that  such  commodities 
are  themselves  capital. 

The  special  advantage,  possessed  by  any  one, 
is  not  calculable  from  a  comparison  with  a 
competitor,  wholly  without  any  similar  facilities 
for  production,  for  such  an  individual  cannot 
usually  compete  at  all.  If  the  marginal  pro- 
ducer of  a  certain  commodity  is  such  because 
he  is  using  old-fashioned  machinery,  no  part  of 
his  income,  though  it  is  certainly  a  "  facility  for 
production,"  arises  from  his  possession  of  it,  as 


Opportunity  1 79 

is  well  understood  by  economists,  nor  if  he  sells 
it  can  he  get  anything  more  than  its  value  as 
scrap.  There  is  therefore  such  a  thing  as  "  no 
rent  machinery "  as  well  as  "  no  rent  land." 
The  limit  of  what  a  marginal  manufacturer 
will  pay  for  the  use  of  improved  machinery  is 
not  the  interest  on  its  cost,  but  the  advantage 
it  gives  him  over  his  marginal  competitor,  who 
is  using  *'  no  rent  machinery,"  less  of  course 
the  lowest  profit  that  will  induce  him  to  sub- 
ject himself  to  the  risks  involved  in  making 
the  change.  But  he  rarely  has  to  pay  all  of 
this,  as  his  gain  in  substituting  improved  ma- 
chinery for  old  is  frequently  many  times  as 
large  as  the  smallest  profit  that  would  lead  to 
the  change.  This  however  is  not  due  to  his 
unwillingness  to  pay,  if  necessary,  the  full  value 
to  him  of  the  advantage  gained,  but  to  the  fact 
that  the  owner  of  the  patented  machine  will 
not  find  it  to  his  own  advantage  to  exact  all 
that  he  could,  and  would  exact,  if  our  manu- 
facturer was  his  only  possible  customer,  as  will 
at  once  be  perceived  by  any  one  conversant 
with  the  laws  of  monopoly  price.  But  what- 
ever the  manufacturer  pays  for  his  advan- 
tage, he  at  first  exacts  its  full  value,  or  very 
nearly  its  full  value,  from  the  consumer  of  his 
product,  and  that  without  raising  the  price  to 
the  consumer,  thus  again  showing  us  that  the 


i8o     Enterprise  and  Production 

income  arising  from  embodied  opportunity  is 
of  the  same  kind  as  the  rent  of  land,  in  that 
neither  of  them  affect  the  price  of  the  product, 
except  as  the  aggregate  amount  of  the  com- 
modity brought  to  market  is  increased.  Later 
of  course  the  price  is  affected,  but  it  will  be 
lowered  instead  of  raised.  Here  again  its  na- 
ture as  rent  becomes  apparent.  It  is  lowered 
because  the  competitor  at  the  old  margin  is 
driven  out  of  business,  just  as  the  settlement  of 
new  and  more  fertile  lands  raises  the  limit  of 
culture,  and  lowers  the  price  of  agricultural 
products  and  the  rentals  of  old  farms. 

Of  course  the  time  eventually  arrives  when 
the  gain  from  the  use  of  new  and  improved 
machinery  exactly  equals  the  interest  on  the 
investment  cost.  This  equality  is,  however, 
only  momentary,  for  the  progress  of  the  arts 
renders  it  certain  that  even  when  kept  in  perfect 
repair  it,  in  its  turn,  will  become  obsolete,  and 
the  income  derived  from  its  use  will  steadily 
decrease  below  the  rate  of  interest  on  invest- 
ment cost,  until  it  itself  becomes  marginal 
machinery  and  yields  no  income  at  all. 

Now,  it  is  open  to  any  one  who  insists  on 
classifying  *'  fixed  capital "  with  capital,  and  on 
considering  the  income,  derived  from  its  use,  as 
interest  and  not  as  rent,  to  claim  that  the  aver- 
age return,  taking  the  life  of  the  machine  as  a 


Opportunity  i8i 

whole,  will  equal  the  interest  on  the  investment. 
This  claim  will  not,  however,  stand  examination. 
That  the  value  of  the  total  use  will  equal  the 
investment  cost  and  the  interest  upon  it  is  not 
even  the  minimum  expectation  of  the  enter- 
priser installing  the  machine  in  question.  His 
real  expectation  is  always  greater  than  this,  the 
difference,  of  course,  being  his  profit  on  the  in- 
vestment, and  it  is  expressed  in  the  capitalised 
value  of  his  plant  in  excess  of  its  cost,  but 
comes  to  him  in  yearly  sums  whose  amount  is 
governed  by  the  laws  of  rent,  and  not  by  the 
laws  of  interest,  just  as  an  increase  in  the  value 
of  the  use  of  a  farm  accrues  in  the  form  of  rent, 
but  also  affects  the  market  value  of  the  farm 
and  appears  as  a  profit  when  the  old  and  the 
new  selling  prices  are  compared. 

Of  course  when  the  advantage  in  question  is 
like  that  conferred  by  an  inexpensive  tool, 
easily  acquired  by  all  competitors  including 
the  marginal  one,  users  of  the  tool  soon  lose 
any  relative  advantage  conferred  by  it.  The 
difference,  however,  is  one  of  degree  only,  and 
cannot  therefore  serve  as  a  distinction  of  kind. 
In  such  cases  there  is  a  near  approach  to  interest 
in  the  amount  of  income  derived  from  its  use, 
but  because  two  incomes  tend  to  be  equal  in 
amount  is  no  proof  that  they  belong  to  the 
same  species,  unless  the  coincidence  is  entirely 


1 82     Enterprise  and  Production 

due  to  the  same  causes;  but,  as  we  have  al- 
ready seen,  the  fluctuations  in  the  value  of  a  use 
about  its  mean  are  due  to  a  different  set  of 
causes  from  those  affecting  the  variations  of  the 
rate  of  interest  about  its  mean,  even  when  an 
equilibrium  tends  to  be  established  between 
the  means. 

I  do  not  remember  to  have  seen  it  noticed 
that  the  fluctuations  in  the  value  of  com- 
modities held  for  sale,  which  are  generally  re- 
garded as  items  of  capital,  are  by  no  means 
subject  to  the  laws  regulating  the  rate  of  in- 
terest. The  net  income  arising  from  these 
fluctuations  is  correctly  considered  a  profit  or 
loss,  as  the  case  may  be.  And  yet  these  fluc- 
tuations are  manifestly  governed  by  the  same 
law,  that  of  scarcity  or  of  the  action  of  demand 
on  a  restricted  supply,  that  regulates  rentals  of 
all  sorts.  Why,  then,  is  the  special  kind  of  in- 
come in  question  neither  interest  nor  rental, 
but  profit?  It  is,  of  course,  easy  to  understand 
that  the  gain  arising  from  the  enhanced  value 
of  any  saleable  commodity  corresponds  to  the 
gain  to  a  landlord  arising  from  the  enhanced 
value  of  his  farm,  and  that  both  are  of  the 
nature  of  profit,  and  that  no  income  of  rent 
arises  from  a  **  stock  in  trade,"  because  holding 
it  for  a  market  is  not  a  use.  But  if  a  trader's 
stock  is  capital,  why  is  not  any  income  that 


Opportunity  183 

arises  from  carrying  it  interest,  rather  than 
profit?  The  reason  is  to  be  found  in  the  fact 
that  capital  does  not  consist  in  any  aggregate 
of  specific  things,  but  in  command  over  pur- 
chasing power  in  general.  Capital  is  invested 
in  saleable  commodities  just  as  it  is  invested  in 
land  or  a  patent  right,  but  the  specific  things 
in  which  it  is  invested  do  not  thereby  become 
capital  any  more  than  land  or  patent  rights  do. 
The  capitalist,  as  such,  owns  nothing  but  a 
claim  ;  the  enterpriser  and  the  landlord  are  the 
only  possessors  of  specific  things,  and  therefore 
any  income  arising  from  the  ownership  of  prop- 
erty accrues  to  the  one  as  a  profit,  and  that  from 
its  use  to  the  other  as  a  rental ;  while  the  in- 
come arising  from  the  ownership  of  a  claim  ac- 
crues in  the  shape  of  interest  to  the  capitalist. 
This  whole  subject,  about  which  prevalent  ideas 
are  at  the  least  somewhat  hazy,  clears  up  at  once 
when  viewed  from  the  standpoint  of  enterprise, 
and  it  also  becomes  apparent  that  to  speak  of 
**  fixed  capital "  or  **  circulating  capital "  really 
involves  one  in  a  contradiction  of  terms,  as 
capital  cannot  be  what  it  is  invested  in. 

As  soon  as  enterprise  is  recognised,  as  the 
only  standpoint  from  which  economic  pheno- 
mena can  be  perceived,  fully  and  in  their  due 
proportions  and  relations,  the  character  of  rentals 
as  a  fundamental  form  of  income,  and  of  oppor- 


1 84     Enterprise  and  Production 

tunity  as  a  real  productive  factor,  becomes  very 
obvious,  and  the  distinction  between  rent  and 
interest  very  plain  and  simple.  Interest  is  what 
enterprisers  can  be  forced  to  pay  to  obtain  a 
certain  amount  of  command  over  general  pur- 
chasing power,  when  the  return  of  the  loan  is 
made  absolutely  secure,  and  its  fluctuations  de- 
pend of  course  on  the  supply  of  and  demand 
for  purchasing  power  in  general.  Rental,  hire, 
or  royalty  is  what  enterprisers  are  forced  to  pay 
for  the  special  opportunity  or  advantage  in  pro- 
duction afforded  by  the  enjoyment  of  special 
privileges,  or  by  the  use  of  specific  things  to  be 
returned  intact,  and  its  fluctuations  are  deter- 
mined for  the  use  of  each  specific  thing  by  the 
supply  of  and  demand  for  such  use  alone, 
whether  such  specific  thing  be  land,  a  store, 
factory,  dwelling,  or  a  horse  and  waggon,  or  only 
an  idea.  The  fact  that  the  supply  of  some  of 
these  things  can  be  more  readily  and  quickly 
increased,  through  a  transformation  of  saleable 
commodities  into  articles  held  for  use,  while  it 
tends  to  bring  about  for  such  things  an  approach 
in  the  total  amount  actually  received  as  rent, 
to  the  total  amount  that  would  have  accrued  as 
interest  and  profit  combined  if  no  such  invest- 
ment had  been  made,  never  makes  them  identi- 
cal either  in  character  or  amount.  There  is 
always  some  interval  before  supply  catches  up 


Opportunity  185 

to  an  increased  demand,  and  a  longer  interval 
before  a  supply  already  in  existence  can  adjust 
itself  to  a  decreased  demand,  because  this  ad- 
justment can  result  only  from  the  consumption 
or  the  wearing  out  by  use  of  some  of  the  spe- 
cific things  in  question.  During  these  two 
intervals,  the  laws  of  rent  are  alone  operative. 
And  the  laws  governing  rentals  are  still  alone 
operative,  when  this  equilibrium  happens  to 
coincide  with  the  equilibrium  established  by 
the  laws  of  interest  for  purchasing  power  in 
general. 

As  to  privileges,  such  as  those  covered  by  pat- 
ent rights  or  those  for  the  use  of  which  a  royalty 
or  rental  is  exacted,  the  principle  is  the  same 
although  the  details  are  different.  Here  the 
supply  is  theoretically  inexhaustible,  although 
practically  the  utiHsation  of  the  privilege  is  lim- 
ited by  the  labour  available  and  by  the  amount 
of  capital  in  the  possession  of  those  upon  whom 
it  is  conferred.  The  limitation  is  in  the  effectual 
demand,  as  is  well  understood  by  economists, 
and  we  need  not  follow  up  the  matter  here,  as 
no  one  should  now  deny  that  land  rentals  and 
royalties  are  incomes  of  the  same  species.  What 
we  have  to  prove  here  is  only  that  the  income 
arising  from  the  use  of  specific  things  capable  of 
indefinite  production  belongs  to  the  same  species 
when  held  for  use  and  not  for  sale,  although  now 


1 86     Enterprise  and  Production 

quite  commonly,  but  wrongly,  regarded  as  only 
a  form  of  interest. 

That  land  rent  is  an  effect  of  monopoly  has 
always  been  recognised,  and  the  only  course 
open  to  any  one  willing  to  be  governed  by 
scientific  principles  of  classification  should  have 
been  to  regard  monopoly  gains  as  the  general 
class  of  which  land  rent  was  only  a  species.  But 
to  the  older  economists  the  peculiarities  of  land 
rent  were  so  obvious  and  the  laws  of  monopoly 
so  vaguely  understood  that  they  not  only  put 
land  monopoly  into  a  class  by  itself,  exclusive 
of  other  monopolies,  but  also  dignified  it  further 
by  placing  it  among  the  four  original  produc- 
tive factors.  This  of  course  left  other  mono- 
polies out  in  the  cold,  which,  as  they  were 
regarded  as  a  very  disreputable  folk,  seemed  a 
proper  enough  place  for  them.  Unquestionably 
many  monopolies  are  tainted  with  fraud  and  op- 
pression, but  it  does  not  follow  from  this  that  the 
incomes  derived  from  them  are  merely  trans- 
ferred to  the  monopolists  from  those  to  whom 
they  really  belong  without  any  change  in  their 
nature.  There  is  of  course  in  some  cases  a 
transference  of  value  from  one  class  of  individ- 
uals to  another,  but,  except  in  the  transference 
by  gift,  theft,  or  gambling,  the  nature  of  the 
income  changes  with  the  character  of  the  recip- 
ient.    Suppose  the  bakers  to  maintain  a  mono- 


Opportunity  187 

poly  by  which  the  price  of  bread  is  doubled. 
The  extra  cost  of  bread  is  of  course  a  loss  of  pur- 
chasing power  to  the  consumer,  and  a  deduction 
from  real  wages  to  the  labourer,  from  real  rent 
to  the  landlord,  from  real  interest  to  the  capi- 
talist, and  from  real  profit  to  all  enterprisers  who 
are  not  bakers,  in  proportion  as  they  continue  to 
consume  bread.  But  to  the  bakers,  while  the 
capitalised  value  of  their  monopoly  is  a  profit, 
their  extra  compensation  is  not  interest,  wages, 
or  profit,  or  any  combination  of  them,  but  is  an 
income  which  arises  from  the  control  of  a  special 
advantage  or  opportunity.  In  other  words,  in 
its  transfer  to  the  bakers  the  income  which  would 
otherwise  have  come  into  being  in  the  forms  of 
rent,  interest,  profit,  and  wages,  partly  of  each 
according  to  circumstances,  actually  appears  in 
the  form  of  rent  alone.  It  is  therefore  created 
by  special  opportunity  in  exactly  the  same  sense 
that  interest  arises  from  capital,  wages  from 
labour,  or  profit  from  enterprise.  Its  nature  as 
income  is  unaffected  by  the  coincident  fact  that 
the  returns  to  capital,  labour,  and  enterprise  have 
been  lessened.  The  total  produced  continuing 
the  same,  any  lessening  of  either  profits,  wages, 
or  interest  is  distributed  among  the  other  forms 
of  income,  but  we  do  not  on  that  account,  for 
instance,  consider  an  advance  in  wages  as  a  kind 
of  profit  just  because  it  has  been  obtained  at 


1 88     Enterprise  and  Production 

the  expense  of  profit.  In  its  transfer  from  the 
employer  to  the  employee  the  income  has 
changed  its  character  from  that  .of  an  unprede- 
termined  residue  to  that  of  a  predetermined 
cost. 

We  have  said  that  the  productive  force  op- 
portunity has  its  origin  in  appropriation,  and 
we  now  seem  to  contradict  this  assertion  by  af- 
firming that  the  three  subsidiary  productive 
factors  are  sometimes  transferable.  And  if  so, 
opportunity  may  sometimes  owe  its  origin  to 
capital  or  labour ;  that  is  to  say,  opportunity 
may  be  made  as  well  as  found.  This  criticism 
would  not  affect  our  general  line  of  argument, 
as  we  have  founded  our  definition  of  Oppor- 
tunity not  on  its  origin  but  on  its  relations  to 
the  enterpriser.  The  validity  of  the  criticism  is 
however  not  so  assured  as  it  seems.  When  an 
opportunity  is  appropriated  without  any  cost 
to  the  appropriator — such  for  instance  as  a  pat- 
ented idea — its  capitalised  value  to  him  is  an 
example  of  almost,  if  not  quite,  pure  profit.  If 
the  act  of  appropriation  has  involved  any  sacri- 
fice of  effort  or  of  accumulations,  the  value  of  the 
opportunity  has  arisen  from  capital  and  labor 
as  well  as  from  the  assumption  of  responsibility 
involved  in  the  act  of  appropriation.  The  em- 
ployment of  capital  and  labour  to  obtain  the 
opportunity  are  merely  conditions  precedent  to 


Opportunity  189 

its  appropriation,  that  is  to  say  that  the  value 
of  the  capital  and  labour  sacrificed,  or  the  pur- 
chasing power  parted  with,  do  not  bear  any 
proportion  to  the  value  of  the  opportunity  ob- 
tained, except  as  they  are  necessarily  less  than 
it,  or  believed  to  be  so.  The  element  of  appro- 
priation therefore,  or  of  getting  something  for 
nothing,  is  not  only  always  present  in  the  origin 
of  opportunity  but  is  also  the  real  incentive  to 
its  acquisition. 

We  have  not,  except  in  a  few  instances,  used 
the  term  **  special  opportunity  "  because  it  is 
really  tautological — that  is  not  a  competitive 
advantage  which  is  merely  a  facility  open  at 
all  times  to  everybody.  The  very  purport  of 
the  word  is  that  others,  or  some  others,  are  ex- 
cluded from  possessing  it.  More  than  this, 
enough  must  be  excluded  to  leave  an  advantage 
to  those  possessing  it,  or  nothing  will  be  paid 
for  its  use.  The  tendency  of  all  opportunities, 
except  those  limited  by  nature,  is  to  become 
more  and  more  common,  and  as  they  become 
more  common,  they  lose  their  power  to  com- 
mand a  reward,  and  when  they  become  so  com- 
mon that  those  possessing  them  have  no  ad- 
vantage at  all  over  marginal  competitors  in 
their  special  line  of  business,  they  disappear  as 
opportunities  to  the  extent  that  they  were  ap- 
propriated but   remain  as  facilities  of  produc- 


iQo     Enterprise  and  Production 

tion,  usually  of  wider  application  and  greater 
productivity  of  utility  than  they  possessed  as 
opportunities,  and  the  increased  product  is  dis- 
tributed as  real  wages,  real  interest,  and  real 
profit,  instead  of  accruing  as  rent.  On  this  ac- 
count some  may  find  difficulty  in  conceiving 
opportunity  as  a  productive  force,  at  all^  and 
there  is  an  apparent  anomaly  in  considering  as 
a  productive  force,  that  whose  decrease  as  an 
income  producer  leads  to  an  increase  in  the 
product.  The  explanation  lies  in  the  compari- 
son being  made  at  the  wrong  period  of  the 
process.  Excepting  those  instances  where  the 
many,  already  in  possession  of  facilities,  are 
robbed  of  them  in  order  to  confer  them  as  op- 
portunities upon  a  favoured  few,  the  original 
seizure  and  exploitation  of  an  opportunity  in- 
volves an  increase  in  the  total  product,  as  the 
new  way  has  to  compete  with  the  old  way 
and  manifestly  cannot  supplant  it  otherwise. 
Those  who  first  seize  the  opportunity  naturally 
retain  as  much  of  the  benefit  as  they  can,  but 
cannot  keep  it  all  for  themselves,  even  when 
they  have  no  competitors,  unless  the  limitation 
of  the  monopolised  facility  for  production,  like 
land,  is  limited  by  nature  and  not  subject  to 
human  influences.  But  even  land  is  not  strictly 
limited  by  nature,  because  not  only  can  fresh 
land  still  be  brought  under  culture,  but  because 


Opportunity  191 

also  new  and  improved  processes  have  an  ef- 
fect upon  the  **  margin  of  culture."  In  what 
they  succeed  in  retaining  for  themselves,  the 
owners  of  opportunities  necessarily  restrict  the 
amount  of  benefit  accruing  to  society,  inclusive 
of  themselves.  As  others  avail  themselves  of 
an  opportunity,  competition  arises,  and  while 
the  new  industrial  process  increases  as  a  facility, 
it  loses  in  its  characteristic  of  opportunity. 

Now  how  does  the  income  arising  from  the 
possession  of  such  opportunities  differ  from  the 
rent  of  the  land  ?  The  differences  are  of  course 
considerable,  but  the  question  is  whether  they 
are  of  a  character  to  forbid  our  regarding  the 
two  incomes  as  species  belonging  to  the  same 
general  class.  According  to  the  principles  of 
classification  we  have  assumed  as  correct,  they 
must  belong  to  the  same  general  class  because 
their  similar  relation  to  enterprise  is  necessarily 
fundamental.  When  the  enterpriser  assumes 
control  over  land,  or  other  monopoly,  either 
through  appropriation,  purchase,  or  lease,  his 
object  is  always  the  same,  namely  to  acquire 
necessary  or  special  advantages  in  production. 
Surely  all  incomes  due  to  advantages  possessed 
belong  to  the  same  general  class  no  matter  how 
greatly  they  differ  in  permanency  ;  and  it  would 
be  difficult  to  point  out  any  characteristic  in 
which  the  rent  of  a  farm  differs  from  the  rent 


192     Enterprise  and  Production 

of  a  factory,  not  due  to  the  special  advantages 
afforded  by  the  former  being  more  permanent. 
In  a  static  society,  that  is  at  any  given  moment 
of  time,  as  the  total  amount  of  neither  of  them 
could  be  changed,  are  they  not  practically  iden- 
tical in  character  ? 

The  old  distinction  between  land  and  other 
forms  of  monopoly,  of  which  so  much  has  been 
made,  is  really  of  very  little  theoretic  import- 
ance in  this  connection.  Facilities  furnished  by 
nature  are  indeed  absolute  necessities  to  all  pro- 
duction. We  cannot  produce  wheat  without 
land,  but,  for  that  matter,  neither  can  we  produce 
sound  without  air.  Air  is  as  truly  necessary  to 
the  production  of  music  as  is  land  to  the  pro- 
duction of  wheat.  That  land  commands  a  rent 
is  due  to  its  limitations  and  not  to  its  being  a 
necessity.  If  we  could  plant  our  wheat  in  the 
air  and  force  it  to  germinate  floating,  wheat  lands 
would  still  command  the  same  rentals  if  the 
aerial  cultivation  was  the  more  expensive.  Again 
if  it  cost  us  some  other  satisfaction  to  get  all 
the  air  we  desired,  air  would  command  a  rental 
when  furnished  to  us  in  the  required  condition. 
Advantage  is  essentially  relative  and  is  not  made 
positive  by  becoming  exclusive.  To  make  it 
positive  in  any  sense  at  all  two  things  are  essen- 
tial. It  must  all  be  owned  and  controlled  by 
one  person  or  group  of  persons  who  refuse  to 


Opportunity  193 

compete  with  each  other,  and  its  product  must 
not  only  be  absolutely  essential  to  human  life, 
but  the  amount  required  must  be  independent 
of  cost.  An  unlimited  demand,  that  is  a  demand 
at  any  price  the  buyer  can  pay,  must  meet  a 
strictly  limited  supply.  Land  and  land  products 
are  very  far  from  meeting  these  conditions,  es- 
sential to  differentiating  the  income  from  land 
and  the  income  arising  from  other  opportunities, 
and  when  so  differentiated  it  would  be  extortion 
rather  than  rent.  So  long  as  an  additional  de- 
mand for  wheat  can  be  satisfied  at  a  slightly 
greater  expense  than  the  price  of  wheat  as  fixed 
by  the  use  of  the  present  facilities  for  producing 
it,  the  advantage  possessed  by  the  ownership  of 
land  is  just  as  relative  as  that  conferred  by  the 
possession  of  a  factory.  This  can  always  be 
effected  by  intensifying  culture  if  no  new  lands 
are  available. 

There  is  of  course  a  valid  distinction  between 
articles  obtainable  only  in  larger  quantities  at 
increased  cost  and  those  at  a  cost  per  unit  de- 
creasing as  the  supply  is  enlarged,  and  a  good 
many  important  economic  truths  are  deducible 
from  it.  Theoretically  however  this  distinction 
does  not  coincide  with  that  between  articles 
supplied  from  the  land  and  those  supplied  by 
other  facilities.  The  two  are  phases  through 
which  all  commodities  pass  at  certain  stages  of 


194     Enterprise  and  Production 

supply.  It  is  not  only  that  in  the  early  stages 
of  land  cultivation  increase  in  the  intensity  of 
culture  may  increase  the  production  per  unit  of 
capital  and  labour,  and  that  there  is  a  limit 
to  the  size  of  factories,  and  to  the  extension 
of  business,  beyond  which  the  cost  per  unit  of 
product  is  increased,  but  also  the  fact  that  the 
character  of  the  tendencies  which  affect  rent  are 
dependent  upon  the  present  worth  of  the  use 
to  the  enterpriser  and  not  upon  the  circum- 
stance of  how  readily  articles  for  use  can  be 
supplied.  It  is  enough  that  such  articles  can- 
not be  immediately  supplied  and  withdrawn  as 
the  demand  for  their  use  varies,  to  furnish  the 
reason  for  the  fact  that  fluctuations  in  the  values 
of  uses,  or  in  other  words  rentals,  are  governed 
by  a  different  class  of  tendencies  from  those 
governing  the  fluctuations  of  interest,  the  fluc- 
tuations of  wages,  or  the  fluctuations  of  profit 
and  loss.  The  fact  that  the  circumstances  which 
subject  different  uses  to  these  special  fluc- 
tuations are  not  always  the  same  (differing  es- 
pecially and  mainly  in  the  degree  of  their 
permanency)  only  enables  us  to  divide  things 
used  into  two  or  more  sub-classes,  but  cannot 
justify  the  exclusion  of  any  one  of  them  from 
the  genus  *'  Opportunity." 

A  misconception  similar  to  that  we  have  al- 
ready noticed,  namely,  that  to "  capitalise"  any- 


Opportunity  195 

thing  is  to  change  its  nature  demands  our 
attention  here.  This  is,  that  as  all  investments  in 
tools,  fixed  capital,  and  all  forms  of  opportun- 
ity except  the  natural  powers  of  the  soil  wear 
out  with  use,  they  must  be  regarded  as  articles 
of  slow  consumption  and  as  only  a  sub-class  of 
consumable  goods.  This  is  true  so  far  as  the 
selling  price  of  such  articles  is  concerned,  and 
every  well-regulated  concern  recognises  this  in 
its  depreciation  account.  But  the  inference 
drawn  from  it  that  there  are  no  special  tendencies 
governing  what  must  be  paid  for  the  use  of 
such  things  is  false.  Two  machines  of  the  same 
cost  and  accomplishing  the  same  results  will 
command  the  same  rent  even  when  one  will 
last  twice  as  long  as  the  other. 

Put  yourself  in  the  place  of  an  analytically- 
minded  investor  and  note  the  considerations 
which  determine  his  action.  Suppose  him  to 
be  contemplating  the  building  of  a  machine 
which  he  expects  to  rent.  After  figuring  the 
probable  rental,  he  compares  it,  after  allowing 
for  running  expenses,  repairs,  and  deterioration, 
with  the  interest  on  its  cost — on,  that  is,  the 
total  of  wages  and  consumable  goods  he  converts 
into  *•  fixed  capital."  If  he  finds  the  probable 
net  rental  only  2%  of  the  investment  cost  {i.  e.^ 
only  equal  to  the  prevalent  rate  of  pure  interest), 
he  will  certainly  not  make  the  investment.  What 


196     Enterprise  and  Production 

more  will  he  demand  ?  Why  in  the  first  place 
at  least  enough  to  keep  the  value  of  his  invest- 
ment intact.  But  this  alone  will  not  wholly 
satisfy  him.  He  must  have  in  addition  enough 
more  to  cover  the  special  risks  attendant  upon 
the  initiation  of  any  enterprise,  and  of  putting 
his  capital  into  an  unchangeable  form.  If  it 
turns  out  that  his  investment  nets  only  2%,  he 
will  certainly  be  unable  to  get  any  one  to  take 
it  off  his  hands  at  cost,  and  will  get  nothing  for 
the  special  risks  he  subjected  himself  to  as  its 
builder.  Let  us  suppose  that  he  finally  gets  a 
net  rental  amounting,  after  charges  of  mainten- 
ance and  depreciation  are  paid,  to  7^,  which  he 
regards  as  just  satisfactory,  or  marginal.  Of 
this,  2%  would  be  pure  interest  and  5^  some- 
thing else.  Let  us  now  consider  the  case  of  a 
man  contemplating  the  purchase  of  a  farm  which 
he  proposes  to  rent.  He  would  probably  be 
satisfied  with  a  net  rental  of  6^,  namely  2%  pure 
interest  and  4^  something  else,  as  he  would  not 
have  to  undergo  the  initial  risks  of  a  builder. 
If  they  each  borrowed  the  cost  on  bond  and 
mortgage  at  4^,  the  one  would  receive  3^  and 
the  other  2%  annually  from  his  venture,  the  risk 
of  which  would  of  course  be  largely  transferred 
to  the  persons  from  whom  they  borrowed,  en- 
titling them  to  a  profit  in  addition  to  pure 
interest.     Now  how  does  the  economic  charac- 


Opportunity  197 

ter  of  these  two  parties  differ?  As  investors 
they  are  both  entrepreneurs  pure  and  simple, 
as  none  of  their  own  capital  is  invested  in  their 
ventures.  But  because  as  an  investor  the 
landlord  is  an  entrepreneur  or  enterpriser,  there 
is  no  reason  for  considering  the  income  he  re- 
ceives from  his  machine  or  farm  not  a  rental. 
It  certainly  is  such  to  the  one  who  pays  it  to 
him.  As  an  investor  the  landlord  cannot  figure 
out  his  profit  or  loss,  until  he  has  sold  his  farm. 
Then  the  difference  between  buying  and  seUing 
price  less  the  interest  on  his  mortgage  or  his 
pure  interest  on  the  buying  price,  if  he  does  not 
mortgage,  is  certainly  an  element  of  his  profit. 
Is  the  extra  percentage  which  he  has  received 
also  such  an  item  ?  It  must  be  so  considered  if 
we  look  upon  him  simply  as  an  investor.  But 
does  this  change  the  nature  of  the  payment  to 
the  one  who  pays  rent  ?  Manifestly  not,  and 
it  is  surely  the  point  of  view  of  the  payer  which 
is  decisive  as  to  the  nature  of  the  payment,  be- 
cause rental  is  a  fixed  charge  the  amount  of 
which  is  determined  by  influences  peculiar  to 
that  class  of  payments.  But  are  we  entitled  to 
look  upon  the  landlord  simply  as  an  investor  ? 
If  instead  of  investing  in  fixed  capital  he  put 
his  money  into  a  stock  of  commodities  held  for 
sale,  his  profit  and  loss  would  have  been  exactly 
the  difference  between   cost  and  selling  price 


198     Enterprise  and  Production 

less  interest  charges.  Why  is  an  additional  item 
included  in  the  calculation  when  he  invests  his 
money  in  a  farm  instead  of  in  a  stock  of  salea- 
ble goods?  It  does  not  greatly  matter  perhaps 
what  we  call  this  additional  item  so  long  as  we 
recognise  the  fact  that  it  makes  a  difference  be- 
tween the  two  kinds  of  investment,  for  as 
has  already  been  said,  it  is  the  nature  of  the 
payment  to  the  enterpriser  who  makes  it  which 
determines  its  economic  character.  I  am  con- 
fident however  that  the  correct  view  is  that  it 
is  rental  to  the  receiver  as  well  as  the  payer  be- 
cause its  fluctuations  in  amount  are  subject  to 
influences  peculiar  to  uses.  If  the  investor  buys 
a  farm  under  the  supposition  that  its  selling 
price  will  not  change,  what  he  does  is  to  accept 
a  rental  instead  of  a  probable  profit  which  he 
might  make  on  an  equal  investment  in  a  saleable 
commodity.  He  subjects  his  investment  to  a 
different  class  of  influences  because  he  considers 
the  chances  are  that  he  will  gain  by  so  doing, 
but  that  does  not  change  the  character  of  what 
he  actually  receives  and  transform  it  into  the 
nature  of  what  he  might  have  received  instead. 
We  are  now  prepared  to  take  up  the  investor 
in  "fixed  capital,"  the  man  who  has  machines  to 
rent,  and  a  very  little  consideration  will  show 
us  that  his  case  differs  from  that  of  the  landlord 
only  in  one  particular,  namely  that  there  is  more 


Opportunity  199 

chance  of  new  machines  being  built  than  of  new 
farms  being  brought  under  culture.  He  takes 
more  chances  and  must  therefore  secure  a 
higher  rental.  But  until  these  new  machines 
are  put  to  work,  his  income  from  those  he  rents 
is  exactly  the  same  in  kind  as  that  of  the  land- 
lord, and  his  investment  differs  from  a  like  in- 
vestment in  saleable  goods  in  exactly  the  same 
way.  The  probability  of  more  competition  in- 
sures indeed  the  fact  that  the  amount  of  the 
rental  will  in  the  long  run  be  approximately 
governed  by  the  cost  of  reproducing  machines, 
but  it  does  not  insure  this  in  the  fluctuations  of 
the  rental  about  its  normal  medium.  That  is, 
the  value  of  the  use  of  the  machine,  and  there- 
fore the  income  from  it,  depends  primarily  upon 
the  supply  of  and  demand  for  it  at  the  time,  just 
as  the  rental  of  a  farm  does,  and  what  will 
be  paid  for  the  privilege  of  using  them  will  in 
each  case  be  governed  by  the  relative  advan- 
tages conferred.  In  each  case  this  relative  ad- 
vantage is  decreased  by  additional  machines 
and  additional  farms  being  created,  but  the  fact 
that  machines  are  more  readily  increased  than 
farms,  even  in  cases  where  farms  cannot  be  in- 
creased at  all,  does  not  in  the  least  change  the 
fact  that  what  the  buyer  pays  for  in  each  in- 
stance is  a  relative  advantage  in  production. 
Ownership  being  an  inherent  part  of  the  func- 


2CX)     Enterprise  and  Production 

tion  of  enterprise,  the  owner  of  the  farm  and  the 
owner  of  the  machine  are  necessarily  enterpris- 
ers so  far  as  they  have  submitted  themselves  to 
the  risk  of  a  change  in  the  selling  price  of  the 
farm  or  the  machine.  The  retention  of  the 
farm  and  machine  in  the  one  case  and  the  re- 
tention of  the  stock  of  saleable  goods  in  the 
other  subjects  them  to  an  interest  charge  which 
is  a  predetermined  cost.  The  point  wherein 
they  differ  is  this,  that  this  cost  is  compensated 
in  the  one  case  by  an  expected  but  unpredeter- 
mined  residue,  or  a  profit,  and  in  the  other  by 
the  value  of  a  use  or  a  predetermined  rental. 
The  enterpriser  as  such  pays  interest  to  take  a 
chance  ;  the  landlord  and  the  owner  of  "  fixed 
capital  '*  pay  interest  to  obtain  control  of  a  use 
or  privilege. 

The  principle  of  the  law  of  diminishing  re- 
turns applies  to  all  special  opportunities  as  well 
as  to  land,  though  its  statement  has  to  be  some- 
what modified.  Each  increment  in  the  use  of 
any  special  advantage,  each  "dose  of  capital  and 
labor,*'  lowers  the  productivity  of  the  special 
advantage  enjoyed  per  unit  of  the  labour  and 
capital  engaged,  until  the  point  is  reached 
where  a  further  increment  of  such  use  would 
lessen  the  aggregate  gain  of  the  controller  of 
the  opportunity. 

Neither  is  the  diversity  in  productive  power 


Opportunity  201 

peculiar  to  land  facilities.  We  see  something 
very  much  like  it  in  the  manufacturing  industry 
considered  as  a  whole.  Factories  in  the  same 
business  differ  greatly  in  productivity,  the  mar- 
ginal one  being  that  which  it  just  pays  to  run 
rather  than  to  abandon  or  dismantle. 

The  laws  of  land  rent  and  of  monopoly  are 
treated  exhaustively,  and  with  great  length  and 
minuteness,  in  the  literature  of  the  subject, 
which  does  not  need  to  be  reviewed  here.  My 
purpose  being  supplementary,  my  mission  is 
only  to  call  attention  to  the  fact  that  land  rent 
is  included  in,  and  is  only  an  instance  of,  the 
general  law  governing  the  using  of  all  things, 
or,  as  I  should  prefer  to  call  it,  the  law  of  op- 
portunity, and  that  this  manner  of  viewing  the 
subject  is  the  necessary  corollary  of  the  defini- 
tion of  the  science  here  given,  the  position  here 
claimed  for  the  enterpriser,  and  the  principles 
of  classification  adopted  by  us  as  a  guide. 

Theoretically  it  is  easy  enough  to  distin- 
guish between  enterprise  and  opportunity 
and  between  their  rewards.  In  practice,  how- 
ever, we  are  confronted  with  the  difficulty 
that  we  have  no  special  term  for  the  income 
arising  from  special  advantage,  but  only  such 
terms  as  rent,  hire,  and  royalty,  covering  such 
special  instances  of  such  income  as  are,  or  could 
be,  paid  over  by  the  user  to  the  owner  of  the 


202     Enterprise  and  Production 

opportunity ;  and  we  have  no  term  at  all  for 
the  income  accruing  from  such  an  opportunity 
as  a  secret  process,  or  exceptional  personal 
ability,  when  it  is  owned  and  operated  as 
it  necessarily  is  by  the  same  individual.  As 
such  an  opportunity  cannot  be  capitalised,  and 
because  the  two  are  not  differentiated  in  the 
mind  of  the  recipient,  we  are  accustomed  to  re- 
gard the  income  arising  from  it  and  from  enter- 
prise as  homogeneous,  and  to  speak  of  it,  and 
to  look  upon  it,  as  a  profit — a  very  dangerous 
error  because  such  a  natural  one.  As  the  op- 
portunity itself  is  a  profit,  it  is  easy  to  speak  of 
the  income  from  its  undifferentiated  use  as  also 
a  profit.  Just  as  in  individualistic  production 
the  productive  factors  are  not  differentiated, 
because  their  influences  are  all  focussed  upon 
the  same  individual  mind,  so,  in  such  cases,  the 
productive  factor  opportunity  is  not  differen- 
tiated from  enterprise  because  the  two  influ- 
ences are  focused  upon  one  intelligence,  by 
which  they  are  rarely  considered  separately.  It 
is  for  this  reason  perhaps  that  the  Risk  Theory 
of  Profit  is  repugnant  to  a  good  many  thinkers. 
They  consider,  very  rightly,  that,  though  from 
its  very  nature  there  can  be  no  set  proportion 
between  the  actuarial  value  of,  and  the  actual 
amount  of  reward  for,  any  single  responsibility 
assumed,  that  some  such  proportion  should  ex- 


opportunity  203 

ist  between  the  actuarial  value,  and  the  average 
of  the  actual  rewards  of  risks  assumed.  Such 
proportions  undoubtedly  do  exist,  though  we 
have  very  inadequate  means  of  determining 
them  statistically,  but  the  average  gains  of  in- 
dividual enterprisers  certainly  fail  to  conform  to 
any  such  proportions.  Large  average  gains 
often  accrue  in  ventures  involving  little  actua- 
rial risk  and  responsibility,  and  this  fact  is  in- 
tuitively felt  to  be  inconsistent  with  the  theory. 
We  have  of  course  the  explanation  in  what  has 
been  said  above,  namely  that  these  dispropor- 
tional  gains  are  not,  as  is  generally  assumed, 
homogeneous  as  they  appear  in  yearly  incomes, 
and  wholly  of  the  nature  of  profit.  They  are 
the  joint  reward  of  enterprise  and  opportunity. 
The  capitalised  value  of  the  seized  opportunity 
is  a  profit  of  a  nature  hardly  subject  to  average. 
The  distinction  in  these  cases  is  further  com- 
plicated, and  made  more  subtle,  by  the  fact  that 
the  seizure  of  the  opportunity  is  itself  an  act  of 
enterprise,  and  its  capitalised  value  a  profit. 
As  in  the  cases  supposed  the  value  of  the  op- 
portunity is  not  capitalized  even  in  the  mind  of 
its  appropriator,  he  makes  no  distinction  at  all 
between  the  value  of  the  opportunity  and  the 
value  of  its  use,  such  as  is  readily  and  always 
made  when  the  opportunity  is  embodied  in  a 
material  thing,  such  as  land,  or  even  in  a  clearly 


204     Enterprise  and  Production 

defined  right,  such  as  a  patent  which  can  either 
be  sold  or  rented  out  on  royalty.  The  profit 
obtained  by  appropriation,  whether  it  be  a  ma- 
terial thing,  a  legal  right,  or  only  a  new  idea, 
bears  no  proportion  to  the  risk  and  responsibil- 
ity involved  in  the  act  of  appropriation,  but  that 
is  due,  not  to  the  nature  of  the  reward  for  the 
act,  but  to  the  absence  of  competition.  It  is 
only  because  competition  exerts  a  controlling 
influence,  that  the  average  of  the  rewards  of 
risk  tends  to  be  proportional  to  the  actuarial 
value  of  the  risks  assumed.  Profit  is  the  unpre- 
determined  residue  after  the  claims  of  the  three 
subsidiary  factors  are  satisfied.  The  seizure  of 
an  opportunity,  whether  it  be  the  appropriation 
of  unoccupied  land,  or  the  first  application  of  a 
valuable  idea,  does  not  necessarily  imply  any 
competition,  any  use  of  capital,  or  any  but  a 
very  slight  exercise  of  effort,  or  the  possession 
of  any  other  special  advantage.  In  such  cases 
there  are  practically  no  limits  imposed  by  com- 
petition, or  any  claims  of  opportunity,  capital, 
or  labour  to  be  satisfied  ;  the  whole  product  or 
almost  the  whole  product  is  the  residue  and 
accrues  to  the  enterpriser.  The  opportunity 
gained  comes  to  the  enterpriser  as  a  profit,  but 
is  invested  in,  and  retained  as,  the  subsidiary 
productive  factor  opportunity,  just  as  savings 
from  wages   or   from   rent,  interest,  or   profits 


Opportunity  205 

necessarily  become  either  individualistic  or  eco- 
nomic capital. 

Defining  the  subsidiary  factors  in  terms  of 
their  relation  to  enterprise  also  enables  us  to 
give  a  precise  definition  of  *'  fixed  capital,'*  a 
term  very  loosely  used,  especially  by  those  at- 
tempting to  enumerate  its  items.  The  proper 
distinction  between  it  and  "  circulating  capital  '* 
is  evidently  that  the  latter  includes  all  unsold 
consumable  commodities  together  with  all  raw 
material  in  process — what  things,  in  short,  are 
held  for  a  market  or  to  be  used  as  raw  material 
of  salable  goods — while"  fixed  capital  **  includes 
all  things  held  primarily  for  use,  for,  that  is, 
the  facilities  they  afford  for  producing  other 
things,  and  therefore  withdrawn  from  the  mar- 
ket while  in  use.  All  objects  that  eventually 
become  "  fixed  capital "  remain  "  circulating 
capital "  until  they  come  into  the  possession  of 
some  one  who  retains  them  for  use  or  to 
hire  out,  though  strictly  speaking  of  course 
neither  "fixed  capital"  nor  "circulating  cap- 
ital "  are  capital  at  all,  but  only  what  capital  is 
invested  in. 


CHAPTER  VIII 

CAPITAL 

CAPITAL  is  usually  defined,  somewhat  in- 
definitely, as  *'  Wealth  productively  em- 
ployed," but  there  seems  to  be  some  difficulty 
in  determining  just  what  items  of  wealth  are  in- 
cluded in  the  category,  or  just  what  is  meant 
by  "  productively  employed. "  Of  course  the  sci- 
entific usage  of  the  term  '*  wealth  "  must  be  con- 
fined to  denoting  the  accumulation  of  material 
things,  and  I  therefore  pass  by  without  further 
comment  such  as  speak  of  his  ability  to  work 
as  the  "  labourer's  capital,"  or  of  free  institu- 
tions as  the  "  nation's  capital.'* 

The  definition  is  hopelessly  defective,  first  in 
its  assertion  that  capital  consists  of  material 
things,  whereas,  as  is  shown  elsewhere,  it  is  only 
a  fund  of  unexpended  purchasing  power — of, 
that  is,  claims  on  material  things  and  on  such 
rights  or  other  immaterial  things  as  have  a  sell- 
ing price  or  market  value ;  secondly,  in  its  as- 
sertion that  economic  capital  is  restricted  to 
206 


Capital  207 

investment  in  material  things,  whereas  capital 
can  be  invested  in  a  patent  right,  for  example, 
just  as  truly  as  in  a  stock  of  goods  or  in  a  farm 
or  factory ;  thirdly,  in  its  implication  that  capi- 
tal is  a  purely  economic  term,  for  while  it  is 
true,  that  only  a  part  of  the  claims  on  wealth 
and  rights  is  economic  capital,  the  excluded 
claims  are  either  social  or  individualistic  capital ; 
and  fourthly,  in  its  implied  assertion  that  indi- 
vidualistic and  social  capital  is  not  productive. 
The  custom  is  so  well  established  of  treating 
enterprise,  labour,  capital,  and  land  as  the  four 
productive  factors,  that  it  is  perhaps  hypercrit- 
ical to  call  atentioa  to  the  fact  that  neither  of 
them  can  be  a  factor  at  all.  It  is  the  enter- 
prisers, the  laborers,  the  accumulators,  and  the 
discoverers  and  appropriators  who  do  things, 
and  they  are  therefore  the  true  industrial  fac- 
tors. Harmless  as  the  prevalent  custom  seems 
at  first  sight,  a  good  deal  of  mental  fogginess 
can  be  traced  to  it.  Any  one  for  instance  who 
realised  what  the  terms  were  really  intended  to 
express  could  hardly  be  guilty  of  supposing  that 
**  labour  produces  all  things,"  or  in  other  words, 
that  the  labourer  is  the  only  one  who  does  any- 
thing— the  only  productive  factor — with  its 
connotation  that  he  is  therefore  morally  entitled 
to  the  whole  product.  Also,  as  we  are  about  to 
show,  the  prevalent  misconceptions  as  to  the 


2o8     Enterprise  and  Production 

nature  of  capital  are  directly  traceable  to  treat- 
ing it  more  or  less  unconsciously  as  an  active 
force.  And  the  same  remark  applies  to  the 
fourth  productive  factor,  opportunity.  In  such 
a  science  as  Economics  we  cannot  be  too  exact 
in  our  use  of  terms.  The  exact  definition  of  the 
four  productive  factors  and  their  functions  is  not 
a  very  difficult  matter  to  any  one  approaching 
the  subject  by  examining  into  what  must  be 
done  to  produce  anything — into  what  is  essen- 
tial to  production.  The  moment  we  abandon 
the  present  habit  of  defining  functions  in  terms 
of  their  factors,  and  adopt  the  principle  that  the 
factor  must  be  defined  in  terms  of  the  function 
exercised,  all  difficulties  and  ambiguities  vanish. 
The  word  "  productive  "  has  been,  and  is  yet, 
used  loosely.  We  have  already  noticed  its  im- 
proper employment  as  a  synonym  for  "  profit- 
able." As  every  result  is  a  product,  strictly 
speaking,  all  wealth,  even  a  hoard,  is  employed 
productively,  either  individualistically,  econom- 
ically, or  socially,  though  the  result  or  product 
is  sometimes  only  a  service.  And  the  distinc- 
tion between  services  and  commodities  is  ap- 
parently the  one  sought  by  the  use  of  the  term 
"  productive  "  in  this  connection,  only  if  so  "re- 
productive "  is  the  term  that  should  have  been 
employed.  The  very  nature  of  a  service  ren- 
dered to  a  person  k  that  it  cannot  be  sold  again, 


Capital  209 

because  it  has  no  such  material  embodiment  as 
will  enable  the  recipient  to  transfer  it  to  another. 
It  lacks  the  power  of  persisting,  is  unsuscepti- 
ble of  being  accumulated,  and  therefore  cannot 
ever  become  a  constituent  of  either  capital  or 
wealth,  or  a  productive  factor.  Its  purchasing 
power  vanishes,  or  in  other  words  is  consumed, 
simultaneously  with  its  production.  Anything 
not  consumed  at  the  moment,  which  is  never- 
theless unintended  for  or  incapable  of  exchange, 
can  be  accumulated  and  is  therefore  capital, 
but  only  individualistic  or  social  capital.  A 
hoard  yields  an  individualistic  income  of  satis- 
faction to  a  miser.  On  the  other  hand  every 
commodity,  produced  for  sale  or  to  be  retained 
for  industrial  use,  immediately  on  its  creation 
necessarily  becomes  a  **  capital  good  "  and  its 
purchasing  power  an  item  of  the  economic  pro- 
ductive force,  "  capital.** 

It  is  this  persistence  of  the  value  created 
which  it  is  probably  intended  to  connote  by  the 
use  of  the  term  "  productively  engaged.**  Or 
in  other  words  it  is  sought  to  confine  capital  to 
wealth  employed  in  the  production  of  reproduc- 
tive things,  of  things,  that  is,  that  continue  capa- 
ble of  aiding  in  the  creation  of  purchasing  power, 
as  saleable  commodities  do  until  they  reach  their 
final  consumer,  and  as  "  fixed  capital  **  does  for 
a  longer  time,  and  until  it  is  used  up ;  and,  more 


2IO     Enterprise  and  Production 

or  less  unconsciously,  to  exclude  wealth  em- 
ployed in  rendering  services  to  persons — that 
is  wealth  in  personal  use,  such  as  clothing  or 
a  dwelling.  If  this  is  its  real  intention,  the 
above  definition  of  capital  would  appear  to  be 
inconsistent  with  the  claim  that  all  real  es- 
tate improvements  are  capital,  for  shelter  (the 
service  rendered  by  a  dwelling)  is  not  itself 
capable  of  a  productive  use  by  the  enterpriser, 
as  is  the  case  with  all  material  products,  not  in 
possession  of  the  final  consumer.  Services  like 
shelter  part  with  their  exchangeability  after  the 
first  exchange.  Their  value  cannot  persist,  and 
can  never  become  an  item  of  either  wealth  or 
capital.  On  the  other  hand,  the  value  of  the 
use  of  a  building  employed  as  a  factory  or  shop 
does  persist  and  becomes  incorporated  in  the 
value  of  the  material  product  manufactured  on 
the  premises.  According  to  this  definition  of 
capital,  by  those  who  would  deny  to  land  its 
position  as  a  specific  kind  of  productive  factor, 
land  should  be  considered  capital  when  used  as 
a  farm,  and  not  as  capital  when  used  as  a  park 
or  for  residence.  All  of  these  views  involve  us 
in  insuperable  difficulties.  No  one  regards  only 
those  efforts  as  labour  which  are  expended  on 
the  production  of  material  commodities.  Effort 
is  still  labour  when  rendering  a  personal  service. 
Why  should  capital  be  treated  differently,  and 


Capital  211 

be  supposed  to  become  something  else,  when 
devoted  to  the  production  of  services?  Only 
one  reason  is  possible ;  namely,  because  the  in- 
come derived  from  service-rendering  wealth  is 
subject  to  different  laws  from  those  governing 
the  income  from  other  fixed  capital,  while  the 
principles  governing  wages  of  service  and  the 
wages  of  "productive  labour"  are  the  same. 
But  the  principles  governing  the  rent  derived 
from  a  factory  building  or  store  are  exactly  the 
same  as  those  governing  the  income  derived 
from  dwellings.  The  one  cannot  be  capital  and 
the  other  not. 

Moreover  if  service-rendering  wealth  is  neither 
capital  nor  land,  what  is  it  ?  It  is  certainly  a 
producer  of  income,  and  therefore  a  productive 
factor.  Must  we  consider  it  a  fifth  factor,  along- 
side of  the  four  previously  recognised  ?  Surely 
it  is  evident  enough  that  the  principles  which 
should  guide  us  in  discriminating  between  the 
productive  factors  are  not  to  be  found  in 
the  character  of  the  product,  which  is  usually 
the  joint  result  of  all  of  them  combined,  but  in 
the  character  of  their  incomes,  which  in  its  turn 
is  wholly  governed  by  their  relations  to  their 
employer. 

Employing  the  term  "property**  in  its  usual 
sense  as  including  not  only  all  material  wealth 
but  also  all  "property  rights"  or  valuable  priv- 


212     Enterprise  and  Production 

ileges,  such  part  of  property  is  an  embodiment 
of  "capital**  as  is  held  for  a  market,  and  such 
part  is  an  embodiment  of  "  opportunity"  as  is 
held  off  the  market  and  retained  for  the  benefit 
of  its  use.  We  can,  of  course,  if  the  phraseology 
be  preferred,  divide  property  into  "  circulating 
capital  goods  "  and  "  fixed  capital  goods,"  though 
if  we  do  we  must  depart  from  present  custom 
so  far  as  to  consider  "  land,"  patent  rights,  good- 
will, etc.,  as  constituents  of  the  latter  category, 
and  more  important  still  we  must  entirely  dis- 
abuse our  minds  of  the  idea  that  either  kind  of 
"capital  goods"  commands  an  income  of  in- 
terest. The  use  of  this  phraseology  leads  how- 
ever away  from  the  proper  point  of  view.  To 
the  enterpriser  employing  both  "  circulating 
capital  goods  **  and  "  fixed  capital  goods"  the 
retention  of  the  former  is  a  cost  for  which  he 
pays  interest,  whereas  the  retention  of  the  latter 
is  done  for  him  by  another,  that  is  by  his  land- 
lord, to  whom  the  interest  charge  is  a  cost. 
Interest  on  capital  embodied  in  facihties  or 
"  opportunity  "  is  not  therefore  an  element  in 
the  "  cost  of  the  product/*  while  the  interest  on 
capital  embodied  in  "  circulating  capital  goods  " 
is  such  an  element  of  cost.  This  is  a  very  im- 
portant distinction  and  too  apt  to  be  lost  sight 
of  if  we  persist  in  regarding  "  opportunity  "  as 
only  one  form  of  capital  embodiment.    Doubt- 


Capital  213 

less  it  is  that,  but  the  change  of  embodiment 
has  involved  a  change  of  function.  And  this 
change  of  function  must  be  the  overruHng 
consideration  in  a  science  of  functions  such  as 
Economics  surely  is.  Property  transformed  by 
the  enterpriser  or  in  process  of  transformation 
into  goods  held  for  a  market  is  capital,  or  rather 
"  capital  goods."  Property  used  by  him  as  a 
facility  of  production  is  "  opportunity,"  or,  if 
one  prefers  to  retain  the  old  phraseology, 
**  land."  This  once  perceived,  all  ambiguity  as 
to  what  is  and  what  is  not  economic  capital 
vanishes,  and  I  am  not  aware  of  any  previous 
statement  of  the  "  capital  concept "  equally  clear 
and  precise,  or  founded  upon  principles  which 
entitle  us  to  demand  assent. 

To  retain  possession  of  what  one  makes  or 
buys  simply  to  sell  again  without  utilising  it  in 
the  meantime  is  to  establish  time  relations. 
And  for  the  ability  to  do  this  the  enterpriser, 
as  such,  is  forced  to  pay  interest  to  the  capitalist, 
as  such,  and  this  interest,  whether  paid  to  an- 
other, or  earned  by  his  own  capital,  is  an  element 
of  the  total  cost  to  be  finally  compared  with 
selling  price  to  determine  the  profit  or  loss  of 
any  transaction.  So  also  when  the  enterpriser 
buys  outright  any  property  for  which  he  has  to 
establish  time  relations,  while  using  or  renting 
it  as  a  facility  for  production,  whether  such  prop- 


214     Enterprise  and  Production 

erty  be  a  farm,  water  power,  a  factory,  a  tool, 
or  an  animal,  the  interest  on  his  investment  is 
also  an  element  of  the  total  cost  to  be  finally 
compared,  in  determining  his  gain  or  loss,  with 
the  selling  price  of  the  facility  when  he  finally 
parts  with  it,  plus  the  rental  obtained  in  the 
meantime. 

But  this  interest  is  not  an  element  of  the  cost 
of  the  product  for  the  creation  of  which  an  en- 
terpriser has  secured  the  use  of  the  special 
facility  in  question.  The  element  contributed 
to  cost  by  such  facilities  is  the  value  of  their 
use  expressed  in  rent,  hire,  or  royalty,  as  be- 
comes at  once  evident  when  the  enterpriser 
elects,  not  to  purchase,  but  to  rent  or  hire  them. 
The  nature  of  this  cost  is  not  changed  by  the 
fact  that  the  enterpriser,  as  such,  rents  them 
from  himself  as  a  landlord  or  owner,  any  more 
than  employing  his  own  capital  changes  the  na- 
ture of  the  interest  on  it.  A  farmer  owning  his 
farm  must  be  considered  as  paying  a  rental  to 
himself.  The  fact  that  he  has  borrowed  money 
to  buy  it  does  not  include  the  interest  on  the 
mortgage  in  his  cost  of  production.  This  cost 
to  him,  as  an  enterpriser,  is  exactly  the  same — 
namely  what  the  use  of  it  is  worth — whether 
the  farm  is  owned  free  and  clear,  or  mortgaged 
or  rented.  The  crucial  fact  is  that  the  individual 
enterpriser  does  not  have  to  own  the  things  in 


Capital  215 

which  "  fixed  capital "  is  invested  in  order  to 
retain  control  over  thern,  and  use  them  as  an 
enterpriser,  whereas  his  retaining  the  ownership 
of  all  saleable  commodities  in  which  "  circula- 
ting capital "  is  invested  is  the  very  essence  of 
his  function  of  enterpriser.  The  product  he 
must  own,  but  as  an  enterpriser  he  cannot  own 
the  means. 

The  owner  of  land  or  **  fixed  capital  "  is  him- 
self an  enterpriser  and  his  property  is  a  product 
or  "  capital  good."  To  him  the  interest  on  his 
investment  is  an  item  of  cost  and  the  difference 
between  that  interest  and  the  rental  he  obtains, 
or  could  have  obtained  if  he  had  used  it  himself, 
is  a  profit.  The  interest  on  an  investment 
therefore  is  an  element  of  the  cost  of  the  prop- 
erty invested  in,  but  not  an  element  of  the  cost 
of  the  product  obtained  by  the  use  of  such 
property.  It  is  what  the  use  of  the  property  is 
worth  that  is  such  an  element  of  the  cost,  and  this 
may  be  greater  or  less,  though  usually  greater, 
than  the  interest  on  the  investment. 

Of  course  just  in  proportion  as  an  investment 
in  a  certain  kind  of  facility  can  be  quickly  and 
easily  made  by  anybody,  will  the  value  of  the 
use  tend  to  approach  the  combined  interest  and 
profit  on  a  like  investment  in  consumable  com- 
modities— but  that  by  no  means  identifies  rent 
and  interest.     In  paying  interest  what  the  en- 


2i6     Enterprise  and  Production 

terpriser  buys  are  the  time  relations  it  enables 
him  to  establish.  In  renting  land,  or  hiring  the 
privilege  of  using  facilities  for  production,  what 
he  pays  for  are  the  opportunities  and  facilities 
afforded — that  is,  relations  of  advantage.  The 
time  relations  essential  to  the  utilisation  of  land 
or  privileges  primarily  concern  only  another 
class  of  enterprisers,  namely  the  owners  of  the 
"  facilities,'*  and  not  the  special  enterpriser  who 
rents  or  hires  them  from  the  owners.  The  in- 
terest on  an  investment  in  productive  facilities 
is  a  cost  to  the  owner  only.  To  the  user  the 
cost  is  not  the  interest  on  the  investment,  but 
the  rent,  hire,  or  royalty  the  facility  commands. 
Whatever  else  may  be  found  lacking  in  the 
principles  upon  which  this  treatise  is  founded, 
they  certainly  seem  to  aid  in  clearing  up  any 
confusion  of  thought  on  the  subject  of  capital. 
Our  definition  of  the  science  at  once  tells  us 
that  an  accumulation  of  material  things  created, 
or  appropriated  and  retained,  by  its  owner  for 
his  own  convenience  or  use,  or  to  be  hereafter 
consumed  by  himself  and  those  dependent 
upon  him,  is  an  embodiment  of  individualistic 
capital,  or  opportunity,  according  as  it  is  to  be 
used  up  or  used,  whether  that  accumulation  is 
represented  by  the  barrel  of  flour  in  his  cellar, 
or  by  the  dwelling  in  v/hich  he  lives.  Social 
capital  and  opportunity  are  again  embodied  in 


Capital  217 

the  material  possessions  of  the  state  intended 
to  secure  social  products,  whether  such  pro- 
ducts are  services,  as  they  commonly  are,  or 
commodities  not  produced  for  sale,  but  for  free 
distribution  among  the  people.  Economic  cap- 
ital therefore  is  the  purchasing  power  embod- 
ied in  all  remaining  material  objects  held  for 
a  market — except  possibly  actual  money,  a 
subject  which  will  be  considered  later — because 
every  such  object  is  either  held  for  sale  or  to 
be  used  up  as  raw  material  in  the  production 
of  saleable  services  or  commodities.  All  con- 
sumable wealth  is  embodied  capital,  even  a 
hoard,  as  that  renders  a  service  of  satisfaction, 
or  of  assurance,  to  its  possessor,  but  only  such 
wealth  is  an  economic  embodiment  of  capital 
as  is  held  for  exchange.  Such  wealth  as  is 
held  for  use,  or  to  be  rented,  is  not  capital 
while  so  held,  though  it  can  sometimes  be  re- 
converted into  individualistic  capital  by  devot- 
ing it  to  consumption  instead  of  use,  or  into 
economic  capital  by  putting  it  on  the  market. 

This  view,  as  to  what  constitutes  economic 
capital,  is  obtainable  as  a  corollary  of  our  de- 
finition of  enterprise.  In  accordance  with  the 
principles  of  classification  set  forth,  Capital,  be- 
ing a  subsidiary  productive  factor,  must  be  dif- 
ferentiated by  its  relation  to  Enterprise.  The 
general  class  here  is  "  the  means  needed  by 


2i8     Enterprise  and  Production 

the  enterpriser/'  and  we  must  therefore  dis- 
tinguish the  different  kinds  of  means,  according 
to  our  principles  of  classification,  by  the  differ- 
ent purposes  the  enterpriser  has  in  employing 
them.  Why  does  the  enterpriser,  as  such,  de- 
sire the  control  of  capital,  and  why  will  he  pay 
something  for  this  control  ?  Simply  to  enable 
him  to  hold  his  product  either  for  rent  or  for 
market.  Land  or  any  other  facihty  for  produc- 
tion is  itself  his  product  to  its  owner,  but  so 
long  as  he  devotes  it  to  being  used,  either  by 
himself  or  by  another  to  whom  he  rents  it,  it  is 
withdrawn  from  the  market  and  no  longer  an 
embodiment  of  *'  circulating  capital,"  thus  af- 
fording another  exemplification  of  the  principle 
that  it  is  not  the  productive  factors,  but  the 
productive  functions  which  are  fundamental. 

If  all  material  commodities,  like  services, 
were  consumed  simultaneously  with  their  pro- 
duction, there  would  cease  to  be  any  work  for 
capital  to  do.  The  function  of  "  capital,"  is  to 
preserve  values  during  the  period  of  the  trans- 
formation of  raw  material  into  its  final  form, 
and  until  the  finished  product  reaches  the  final 
consumer  or  while  a  thing  is  withheld  from  the 
market  to  be  used  as  a  facility  of  production. 
What  the  enterpriser  buys  therefore,  when  he 
pays  interest,  is  a  time  relation.  But  it  is  not 
a  time  relation,  but  a  use  or  opportunity  which 


Capital  219 

he  secures  when  he  rents  a  farm  or  factory. 
The  one  who  has  to  pay  for  the  time  relations 
involved  is  the  owner  of  the  farm  or  factory. 
A  relation  of  time  is  indeed  connoted,  but,  as 
we  have  clearly  seen,  what  the  enterpriser,  who 
rents  or  hires,  buys  is  the  result  of  the  time 
relation,  and  not  the  power  of  instituting  the 
relation  itself. 

The  enterpriser's  demand  for  capital,  in  any 
given  state  of  the  arts  and  of  population,  is 
strictly  limited.  If,  for  the  conveniences  of  the 
argument,  we  suppose  wholesale  prices  to  be 
those  for  which  goods  could  be  bought  if  taken 
from  the  factory  as  fast  as  they  were  produced, 
the  difference  between  wholesale  and  retail 
prices  can  be  no  greater  than  what  the  consum- 
ing public  is  willing  to  pay  for  the  convenience 
to  themselves  (that  is  the  time,  trouble,  and  in- 
terest they  save)  in  having  available  stocks  on 
hand,  from  which  such  goods  as  are  desired 
can  be  quickly  and  easily  selected  as  wanted, 
If  anything  occurs  to  double  the  quantity  of 
goods  in  stock,  and  the  public  should  continue 
to  take  them  at  the  old  rate  and  at  the  old 
prices,  the  enterprisers  who  carry  the  stock,  be 
they  first  hands,  jobbers,  or  retailers,  get  only 
the  same  difference  between  initial  cost  and 
selling  price  as  before,  and  on  the  same  amount 
of  sales,  but  the  expenses  for  interest,  insur- 


220     Enterprise  and  Production 

ance,  and  care  are  just  twice  as  great.  Now 
how  does  the  individual  enterpriser  meet  a  con- 
tingency of  this  character  when  it  arises,  as  it 
periodically  does?  In  two  ways:  he  sacrifices 
his  stock  and  lessens  his  production. 

Now  it  is  easy  to  say  that,  as  the  supply  oi 
commodities  constitutes  the  effective  demand 
for  commodities,  there  cannot  be  any  such 
thing  as  a  general  glut,  and  that  therefore  the 
whole  class  of  enterprisers,  taken  together,  can- 
not, as  a  body,  find  themselves  in  the  situation 
depicted.  The  unfortunate  enterpriser  is  sim- 
ply suffering  from  his  own  lack  of  foresight, 
has  misjudged  his  market,  and  produced  the 
wrong  things.  If  he  had  diverted  enough  of 
the  capital  he  borrowed  to  other  occupations, 
and  in  good  time,  he  would  not  have  been 
forced  to  sacrifice  his  goods,  or  lessen  his 
productive  activity.  Even  if  it  be  granted 
that,  if  no  mistakes  were  made  in  production, 
demand  would  always  equal  supply,  that  by  no 
means  proves,  as  seems  to  be  generally  sup- 
posed, that  the  aggregate  amount  of  unsold 
commodities  cannot  be  a  very  variable  quan- 
tity, for  mistakes  are  made  and  many  of  them 
are  unavoidable  by  human  prescience,  and  it  is 
certain  that  more  of  them  are  made  at  some 
periods  than  at  others.  And  if  at  any  time  the 
total  amount   of  unsold  goods    is  unusually 


Capital  221 

great,  it  must  affect  the  average  of  profit 
unfavourably,  and  lead  to  some  cessation  of 
production,  or  in  other  words  to  a  period  of  in- 
dustrial stagnation,  which  will  necessarily  con- 
tinue until  consumption  as  a  whole  has  caught 
up  with  the  lessened  production  on  the  whole, 
and  the  misfits  have  found  purchasers  at  some 
price. 

Though  I  have  never  seen  it  distinctly  stated, 
the  argument  against  the  possibility  of  a  general 
glut  contains  the  implied  assertion  that  the  ef- 
fectual demand  withdrawn  from  the  "  misfits  " 
is  transferred  intact  to  other  commodities,  and 
especially  to  those  which  happen  to  be  relatively 
the  scarcest.  This  is  true,  to  the  extent  that 
the  value  of  such  articles  will  rise  as  compared 
with  the  value  of  the  misfits,  but  not  true  in  the 
sense  that  more  of  such  articles  will  be  effectually 
demanded  than  before.  Nor  is  it  true  that  the 
existence  of  unsaleable  commodities  will  raise 
the  price  of  saleable  commodities.  Articles 
withdrawn  from  the  market,  or  held  at  a  price 
buyers  will  not  pay,  are  virtually  subtracted 
from  both  supply  and  demand.  Misfits  are  al- 
ways so  withheld  or  they  would  not  accumulate. 
The  proportion  of  supply  and  demand  remains 
for  other  articles  just  what  obtained  before,  and 
there  is  no  way  therefore  in  which  an  effectual 
demand  for  more  of  these  other  articles  can  arise. 


222     Enterprise  and  Production 

The  accumulation  of  misfits  therefore  cannot 
lead  to  any  corresponding  diminution  in  the 
stock  of  other  commodities. 

It  is  of  course  an  unquestioned  proposition 
that  a  supply  entirely  composed  of  suitable 
things,  and  in  the  right  proportion,  constitutes 
an  efficient  demand  for  itself.  But  the  corollary 
that  is  universally  drawn,  that  the  maladjust- 
ment of  supply  to  demand  is  always  found  in 
the  character  of  the  supply,  is  false.  The  recog- 
nition of  capital  as  a  subsidiary  factor,  and 
looking  to  its  relation  to  enterprise  for  its  dis- 
tinguishing characteristics,  shows  us  that  the 
much  more  important  cause  of  the  maladjust- 
ment of  supply  to  demand  is  to  be  found  in  the 
character  of  the  demand ;  and  that, consequently, 
the  demand  for  commodities  being  what  it  peri- 
odically is,  no  prescience  on  the  part  of  enter- 
prisers could  enable  them  to  fit  supply  to  it, 
because  a  certain  part  of  the  effective  demand  is 
for  a  kind  of  thing  that  cannot  be  produced  at  all. 

To  obtain  the  necessary  data  for  considering 
this  proposition,  we  have  to  enter  the  individual- 
istic domain,  for  in  the  last  analysis  demand  is 
exercised  by  the  individual,  and  all  Economics 
has  to  do  with  it  is  to  notice  how  the  extent  and 
character  of  the  demand  influence  supply,  or,  in 
other  words,  how  consumption  affects  produc- 
tion.    Men   combine   to  produce  but  do  not 


Capital  223 

combine  to  consume.  Now  what  does  an  indi- 
vidual living  within  his  income  do  with  it  ?  Part 
he  consumes,  and  that  of  course  constitutes  a  de- 
mand for  commodities.  Another  part  he  saves 
and  invests,  or  loans,  and  this  part  may  or  may 
not  exert  a  demand  for  commodities.  The  point 
overlooked  is  that  this  part  of  his  demand  is  for 
retention  and  not  for  consumption.  Somewhere 
in  the  world,  for  every  dollar  saved  and  not  in- 
vested in  "  fixed  capital  **  there  is  an  addition  to 
"circulating  capital"  of  an  unsold  commodity 
worth  a  dollar.  The  world's  stock  of  unsold 
commodities,  or  in  other  words  the  gross  amount 
of  "  capital  goods,"  grows  yearly  by  the  exact 
amount  of  the  world's  net  savings,  less  amounts 
invested  during  the  year  in  tools  and  machinery, 
and  other  forms  of  *  *  fixed  capital."  The  demand 
for  investment  is  therefore  a  demand  for  com- 
modities that  shall  not  be  consumed,  but  that 
shall  be  retained  for  use,  or  held  for  a  market 
at  cost  of  reproduction  inclusive  of  a  normal 
profit.  Now  so  long  as  these  retained  com- 
modities take  a  form  in  which  the  enterpriser 
can  use  them  with  profit  as  tools,  well  and  good. 
But  when  the  supply  is  greater  than  this,  it 
necessarily  goes  to  augment  the  stock  of  unsold 
consumable  goods,  which  as  necessarily  are 
"misfits,"  whether  or  no  they  are  "suitable 
goods/*  and  whether  or  no  they  are  supplied 


2  24     Enterprise  and  Production 

in  the  same  proportion  as  the  demand  for  con- 
sumable goods,  which  by  our  supposition  is  less 
than  the  supply  of  consumable  goods  in  total 
amount ;  and,  as  we  have  seen,  an  increase  in 
the  stock  they  have  to  carry  means  a  decline 
in  the  gains  of  enterprisers,  which  forces  a 
lowering  of  the  general  average  of  profit,  and  a 
consequent  decrease  in  production. 

Now  what  can  enterprisers  do,  by  varying  the 
character  of  the  supply,  to  protect  themselves 
against  this  attack  of  the  saving  classes  upon 
their  chance  of  profit  ?  The  demand  being  for 
accumulated  things,  they  are  forced  to  produce 
more  things  than  they  sell,  so  long  as  they  con- 
tinue producing  at  the  old  rate.  They  escape 
of  course  to  the  extent  in  which  they  are  able 
to  engage  in  new  industries,  which  absorb  a 
certain  amount  of  capital  for  plant,  raw  material, 
and  stocks  of  finished  goods.  This  expedient 
however  serves  more  to  prolong  good  times 
than  to  shorten  hard  times,  as  it  is  mostly  in 
good  times  that  new  ventures  tempt  enter- 
prisers. Manifestly  investment  in  additional 
machinery  will  not  be  made  when  the  product 
of  present  machinery  is  unsaleable.  Another 
avenue  of  escape  can  be  found  in  substituting 
machinery  for  labour,orby  substituting  a  process 
requiring  less  labour  and  more  capital  for  one 
employing  more  labour  and  less  capital     These 


Capital  225 

two  methods,  the  only  expedients  by  means  of 
which  the  field  for  investment  is  widened,  are 
however  only  made  available  by  advances  in 
the  state  of  the  arts,  which  are  acts  of  co-ordin- 
ation not  necessarily  included  in  their  peculiar 
function,  and  not  primarily  under  their  control, 
and  for  which  enterprisers  are  only  responsible 
as  encouragers  and  adopters.  But  all  efforts, 
however  intelligently  directed,  to  supply  an  in- 
vestment outlet  for  accumulations,  without 
impairing  profits,  are  necessarily  only  palliative, 
if  the  accumulation  of  capital  progresses  faster 
than  population  increases  and  the  state  of  the 
arts  advances,  that  is  faster  than  the  field  for 
investment  widens. 

Of  course  this  maladjustment  of  supply  and 
demand  due  to  the  character  of  the  demand  is 
only  temporary.  The  trouble  is  in  the  means 
by  which  re-adjustment  is  finally  effected, 
namely  by  the  slackened  employment  of  labour, 
and  the  absolute  loss  of  all  that  could  have  been 
produced  by  the  idle  capital  and  labour  force. 
The  remedy  is  however  effective.  As  expendi- 
ture is  never  cut  down  to  the  full  extent  in 
which  income  is  curtailed,  the  accumulation  of 
capital  is  necessarily  lessened  by  industrial  in- 
activity and  in  extreme  cases  the  fund  of  pre- 
existing capital  may  be  impaired. 

As  the  enterprisers,  as  such,  are  in  actual  pos- 

15 


226     Enterprise  and  Production 

session  of  all  existing  "  capital  goods,"  the  loss- 
es incident  to  a  supply  of  capital,  in  excess  of 
the  amount  that  can  be  employed  at  a  satisfac- 
tory profit,  fall  primarily  on  them.  It  is,  I  think, 
commonly  supposed  that  they  are  able  to  shift 
the  whole  or  part  of  this  loss  upon  the  capital- 
ists by  refusing  to  pay  the  same  rate  of  interest  as 
before.  The  inadequacy  of  any  such  computa- 
tion is  manifest  when  it  is  noted  that  the  prices 
of  an  enterpriser's  stock  on  hand  often  decline  as 
much  as  thirty  per  cent,  as  compared  with  the 
cost  of  reproduction  ;  whereas  his  possible  sav- 
ing in  interest  charges  cannot  be  greater  than 
two  per  cent.,  as  that  is  about  the  rate  of  pure 
interest.  It  is  however  difficult  to  see  how  they 
are  able  to  effect  even  this  saving  so  long  as 
they  continue  to  produce  at  the  old  rate. 

We  can  turn  the  tables  upon  those  who  will 
not  admit  the  possibility  of  a  general  glut,  by 
reminding  them  that  the  supply  of  capital  is 
the  demand  for  capital  in  exactly  the  same 
sense  that  the  supply  of  commodities  consti- 
tutes the  demand  for  commodities,  except  that 
the  equality  of  the  supply  of  and  demand  for 
capital  is  not  affected  by  the  suitability  of  the 
supply  to  the  demand,  as  is  the  case  with  the 
supply  of  and  demandfor  commodities.  By  the 
necessity  of  the  case,  as  "  capital  goods  "  before 
the   final  consumers  buy   them  can  be  trans- 


Capital  227 

ferred  by  one  enterpriser  only  to  another  enter- 
priser, a  condition  of  equality  always  obtains 
between  the  amount  of  "  capital  goods"  that 
exists,  and  the  amount  of  capital  the  enterpris- 
ers, as  a  body,  must  have,  or  borrow.  How 
then  is  any  change  in  the  rate  of  interest 
brought  about  ?  This  however  is  a  matter  we 
are  not  as  yet  prepared  to  discuss,  and  which 
must  be  deferred  until  the  subject  of  "  Loan- 
able Funds  "  is  treated. 

The  enterpriser  does  obtain  some  temporary, 
though  almost  inappreciable,  relief  in  times  of 
industrial  stagnation,  through  a  decline  in  the 
rate  of  interest.  The  relief  however  does  not 
arise  from  enterprisers  as  a  class  being  able  to 
add  all  the  reduction  in  interest  charges  to 
their  profits,  as  the  reduced  income  of  the  capi- 
talist class  lessens  their  demand  for  consumable 
commodities  so  that,  to  the  extent  that  this  oc- 
curs, what  enterprisers  save  in  interest  charges  is 
sooner  or  later  deducted  from  the  prices  of  their 
remaining  commodities.  To  what  extent  final 
relief  is  afforded  depends  wholly  upon  how  the 
consumption  of  capitalists  is  affected  by  the  re- 
duction in  their  income.  If  they  reduce  their 
expenditures,  and  save  as  much  as  before,  no 
relief  at  all  is  obtained.  To  the  extent  however 
that  their  curtailment  is  in  savings,  the  relative 
demand  for  consumption  is  increased  and  the 


228     Enterprise  and  Production 

further  increase  of  capital  is  checked.  This 
however  will  not  of  itself  better  the  situation  of 
the  enterpriser,  but  will  only  prevent  it  from 
becoming  worse.  If  however  the  living  expen- 
ses of  the  capitalists  trench  upon  their  former 
possessions,  the  oversupply  of  capital  is  to  that 
extent  reduced. 

In  the  application  of  economic  theory  to 
practical  problems,  the  tacit  assumption  has  al- 
ways been  made  that  the  demand  for  capital 
would  be  unlimited  if  it  were  obtainable  with- 
out an  interest  charge.  The  fallacy  of  this  as- 
sumption becomes  self-evident  from  the  stand- 
point here  advocated.  Enterprisers  are  the 
only  real  borrowers  of  capital,  as  the  spend- 
thrift, or  borrower  for  consumption,  is  really 
only  consuming  his  own  capital.  If  enterpris- 
ers could  borrow  without  paying  interest,  they 
could  of  course  utilise  an  additional  amount  of 
capital  to  advantage,  but  would  inevitably 
reach  a  position  in  which  this  would  no  longer 
be  possible,  and  then  they  would  certainly  re- 
fuse to  undertake  enterprises  requiring  further 
accommodations.  This  point  would  be  reached 
for  each  of  them  as  he  found  himself  in  posses- 
sion of  a  stock  of  consumable  commodities,  un- 
saleable despite  the  saving  in  interest  at  the  cost 
of  reproduction,  inclusive  of  a  satisfactory  profit 
for  himself.    And  this  is  as  true  of  the  group 


Capital  229 

as  of  the  individual  enterpriser  so  long  as  it  is 
granted,  as  it  must  be,  that  the  aggregate  of 
such  unsaleable  commodities  varies,  increasing 
and  decreasing  with  the  sum-total  of  accumula- 
tions as  compared  with  the  field  for  invest- 
ment. 

In  dull  times  enterprisers  also  endeavour  to 
avoid  the  cessation  of  production  by  lowering 
money  wages.  This  expedient,  undoubtedly 
effective  to  the  individual  enterpriser,  or  to  any 
special  class  of  enterprisers  when  they  can  con- 
fine it  to  themselves,  is  of  more  doubtful  use 
to  the  class  in  general.  If  it  leads  to  a  corre- 
sponding decrease  in  consumption,  nothing  at 
all  is  gained,  as  it  is  only  when  labourers,  are 
forced  to  suspend  saving,  or  to  expend  part  of 
what  they  have  laid  by  for  a  rainy  day,  that 
the  maladjustment  of  capital  to  its  profitable 
use  is  in  some  degree  rectified.  What  enter- 
prisers pay  for  the  use  of  opportunity  is  also 
reduced  in  bad  times,  but  manifestly  this  re- 
duction, as  is  the  case  with  reductions  in  inter- 
est and  wages,  is  helpful  only  as  it  leads  to  the 
relative  increase  of  consumption  as  compared 
with  income  and  production. 

As  all  these  reductions  in  what  enterprisers 
pay  to  the  subsidiary  factors  lead  to  some  de- 
crease in  consumption,  the  decrease  in  produc- 
tion and  the  intrenchment  upon  savings  (unless 


230     Enterprise  and  Production 

of  course  the  field  for  investment  has  been  un- 
expectedly widened)  must  not  only  be  suffi- 
cient to  wipe  out  the  excess  of  capital  at  the 
time  enterprisers  commenced  curtailment,  but 
must  also  be  sufficient  to  offset  any  decrease  of 
total  consumption  that  occurs  during  the  period 
of  re-adjustment.  If  no  curtailment  of  accum- 
ulation results,  the  lowering  of  rents,  interest, 
and  wages  is  a  positive  disadvantage  to  the 
enterprisers,  because  their  market  is  contin- 
uously narrowed,  which,  to  the  extent  it  reduces 
the  amount  of  capital  required,  intensifies  the 
disproportion  between  the  supply  of  capital 
and  the  uses  to  which  it  can  be  profitably  put. 
One,  and  perhaps  the  principal,  reason  why 
the  connection  between  accumulation  and  the 
periodicity  of  industrial  activity  has  been  so 
generally  overlooked,  and  even  specifically  de- 
nied, is  the  much  more  apparent  connection 
between  this  periodicity  and  abundant  crops. 
This  latter  connection  is  of  course  indisputably 
established  by  observation — an  unquestioned 
inductive  result.  We  have  here  a  good  illus- 
tration of  the  tendency  of  inductive  logicians 
to  rest  satisfied  with  the  establishment  of  a 
fact.  It  is  enough  for  them  that  poor  crops 
are  the  cause  of  bad  times  in  the  sense  of  pre- 
ceding them  ;  i.  e.y  poor  crops  are  the  first  term 
of  the  sequence.    They  of  course  do  not  ignore 


Capital  231 

the  existence  of  an  active  cause,  but  having 
nothing  but  observation  to  rely  upon  for  its 
discovery,  they  are  satisfied  with  the  most 
prominent  reason  that  presents  itself.  This 
most  prominent  reason  is  that  when  crops  fail 
there  is  less  to  divide  among  producers.  There 
is  of  course  no  doubt  of  this  being  true,  but 
how  does  it  explain  the  consequent  reduction 
in  the  employment  of  labourers  ?  We  have 
here  a  striking  example  of  the  danger  of  rea- 
soning from  an  inductive  premise  when  a  de- 
ductive premise  is  obtainable.  The  logical 
process,  whose  results  are  yet  accepted  by  the 
great  body  of  economists,  is  as  follows  :  Crop 
failure  has  resulted  in  an  impairment  of  capital, 
and  as  the  lessened  employment  of  labour  is  a 
coincident  fact,  the  two  must  be  related,  the 
first  as  cause,  the  second  as  effect.  Therefore 
"  capital  employs  labour "  and  there  must  be 
such  a  thing  as  a  "  wages  fund  "  which  varies 
in  amount  with  the  amount  of  capital  in  exist- 
ence; the  more  capital  the  more  employment. 
This  final  result,  logically  as  it  has  been  de- 
duced, has  been  one  of  the  standing  puzzles  of 
the  science,  about  which  disputants  are  as  far 
as  ever  from  agreeing.  Likewise  they  have 
been  led  into,  and  are  yet  sticking  in,  all  sorts 
of  bogs  by  the  previous  assumption  that  "  cap- 
ital employs  labour."     Certainly  capitalists,  as 


232     Enterprise  and  Production 

such,  do  not  employ  labour.  Neither  can  "  cap- 
ital goods  '*  or  "  capital  considered  as  a  fund  " 
employ  labour,  for  capital  however  considered 
is  not  a  person,  and  to  employ  is  a  personal  act. 
As  to  the  "  wages  fund  **  itself,  no  one  has  ever 
been  able  to  determine  what  part  or  proportion 
of  existing  capital  it  is.  Neither  do  any  two 
investigators  agree  exactly  as  to  what  things 
are  capital  or  capital  goods  and  what  things 
are  not.  The  vagueness  and  ambiguity  of 
these  conceptions  has  made  it  impossible  to 
determine  what  it  is  that  decides  the  employ- 
ment of  labour.  Consequently  no  one  has  ever 
even  attempted  to  trace  the  influences  at  work 
thoroughly  and  exactly,  and  some  in  despair 
have  denied  the  existence  of  any  "  wages  fund  " 
at  all. 

The  theory  of  the  Productive  Process  here 
advanced  does  answer  this  question  definitely 
and  intelligently.  It  shows  that  there  is  such  a 
thing  as  a  **  wages  fund  "  in  the  sense  that  at  any 
given  time  the  sum  that  will  be  expended  in 
wages  in  the  near  future  is  predetermined  by 
business  conditions  at  the  time — that  is  upon 
the  rate  of  profit  then  obtaining.  The  rate  of 
profit  in  its  turn  depends  upon  the  ratio  of  capi- 
tal to  the  field  for  its  profitable  investment. 
Instead  of  what  is  now  almost  invariably  as- 
sumed, "  the  more  capital,  the  greater  the  wages 


Capital  233 

fund,"  just  the  opposite  is  found  to  be  the  truth. 
The  more  capital  in  excess  of  what  the  field 
for  profitable  investment  can  absorb,  the  less 
will  be  expended  in  wages  in  the  near  future. 
The  field  for  investment  remaining  the  same 
the  more  capital  the  smaller  the  wages  fund. 

Now  those  determined  not  to  accept  our 
theories  will  hasten  to  ask  :  How  is  it  that  the 
depletion  of  capital  due  to  crop  failure  lessens 
the  employment  of  labour  ?  The  answer  should 
be  obvious ;  namely  that  crop  failure  narrows 
the  field  for  investment  even  more  than  it  de- 
pletes capital. 

Agricultural,  mining,  and  fishing  industries 
differ  from  all  others  in  the  very  important  par- 
ticular that  the  output  of  the  same  amount  of 
productive  energy  varies  greatly  in  different 
years.  When  crops  are  poorer  than  usual,  un- 
less of  course  when  importations  of  food  and 
raw  products  interfere,  the  prices  of  agricultural 
products  advance,  so  that  the  farming  com- 
munity is  about  as  well  off  as  before,  and  some- 
times better  off — except  of  course  to  the  extent 
in  which  they  are  consumers  of  their  own  pro- 
ducts. All  consumers  of  farm  products  suffer 
an  impairment  in  the  purchasing  power  of  their 
incomes  exactly  equal  to  the  increased  cost  of 
food  and  raw  products.  As  they  must  spend 
more  for  these,  they  have  less  to  spend  for  other 


234     Enterprise  and  Production 

commodities.  The  producers  of  these  other 
commodities  cannot  sell  as  many  of  them,  and 
consequently  the  enterprisers  cannot  advan- 
tageously employ  as  much  capital  as  before. 
Mills,  factories,  and  workshops  are  idle  and 
there  is  no  outlet  for  circulating  capital  by  con- 
verting it  into  fixed  forms.  The  field  for  in- 
vestment is  restricted  and  much  existing  capital, 
especially  that  in  fixed  forms,  is  useless  until 
industry  revives.  Capital,  which  was  not  per- 
haps superabundant  before,  finds  itself  suddenly 
pushing  hard  upon  its  limitations.  Profits  dis- 
appear and  workmen  are  discharged.  But  this 
is  not  because  capital  has  been  depleted,  but  in 
spite  of  its  depletion,  and  because  the  uses  for 
capital  have  narrowed  to  a  greater  degree. 

I  have  so  far  said  nothing  of  panics  as  distin- 
guished from  industrial  depressions  because 
what  differences  exist  are  not  at  all  due  to  any 
variation  of  the  fundamental  principles  which 
it  has  been  our  task  to  elucidate.  But  while  the 
action  of  these  forces  in  panics  is  not  abnormal, 
it  is,  as  it  were,  explosive.  It  must  never  be 
forgotten  in  the  application  of  economic  prin- 
ciples to  practical  matters  that  economic  forces 
are  volitional.  They  therefore  only  come  into 
action  as  men's  perceptions  and  conceptions 
change.  So  long  as  confidence  prevails  that  the 
stocks  on  hand  of  unsold  goods  can  be  eventually 


Capital  235 

disposed  of  above  the  cost  of  reproduction,  "cap- 
ital goods"  can  be  accumulated  far  beyond  the 
amount  that  can  really  be  so  disposed  of.  The 
more  however  such  an  accumulation  has  ex- 
ceeded the  real  demand  for  consumption,  the 
more  dangerous  has  the  situation  become.  If 
the  perception  that  this  state  of  affairs  is  being 
approached  is  gradual,  one  after  another  the 
more  prudent  enterprisers  restrict  their  opera- 
tions, and  though  a  period  of  gradually  falling 
prices  and  of  industrial  depression  sets  in  there 
may  be  no  panic.  But  when  some  unforeseen  cir- 
cumstance, especially  the  failure  of  some  great 
banks  and  leading  firms  of  unsuspected  credit, 
destroys  this  general  confidence  suddenly,  a 
general  rush  to  unload  the  stocks  of  unsold 
goods  occurs  at  the  same  time  that  the  difficulty 
of  so  doing  is  increased.  The  retailer  stops 
buying  of  the  jobber,  the  jobber  of  the  whole- 
saler, and  the  wholesaler  of  the  original  pro- 
ducers. The  whole  tendency  of  this  process  is 
to  throw  the  burden  of  accumulation  upon  "  first 
hands."  Very  shortly  the  general  average  of 
income  is  affectedand  the  consumers  despitebe- 
ing  forced  to  spend  a  larger  proportion  of  their 
income  buy  less  and  less  of  the  retailers.  And  so 
the  circle  is  travelled  round  and  round,  until  the 
stocks  of  goods  on  hand  are  so  reduced  that 
prices  again  rise  beyond  the  cost  of  reproduc- 


236     Enterprise  and  Production 

tion,  when  confidence  is  again  restored  and  en- 
terprisers, at  first  cautiously  and  tentatively 
but  with  growing  boldness,  extend  their  opera- 
tions. The  stream  of  products  has  its  periods 
of  spring  freshets  and  of  low  water,  and  confi- 
dence is  the  dam  which,  when  it  breaks  away, 
precipitates  a  flood  of  unsaleable  goods  upon  an 
already  overflowed  market.  But  the  breaking 
of  the  dam  could  not  occur,  or  if  it  should 
occur  would  be  harmless,  if  there  were  no  ac- 
cumulation behind  it  and  pressing  upon  it. 

Among  a  backward  and  unprogressive  people, 
especially  when  property  is  not  secure,  only  a 
great  expectation  of  profit  will  tempt  enter- 
prisers, and  the  rate  of  "  normal  profit  "  (if  the 
term  may  here  be  allowed)  will  be  very  high. 
At  the  same  time  the  normal  rate  of  pure 
interest  will  be  very  low,  as  is  shown  by  the 
fact  that  the  wealth  of  such  countries  is  so 
largely  hoarded,  a  proof  that  the  proportion  of 
those  wiUing  to  accumulate  without  any  in- 
ducement of  interest  is  large.  We  have  here 
an  explanation  of  poor  countries  investing  so 
much  of  their  savings  in  jewelry  and  precious 
stones,  or  in  hoards  of  the  precious  metals. 
Market,  or  gross,  interest  is  to  be  sure  high, 
but  that  is  because  it  is  mainly,  or  perhaps 
wholly,  insurance,  and  not  pure  interest.  We 
speak  of  such  a  people  as  unenterprising,  and 


Capital  237 

very  rightly ;  for  enterprise  is  so  hampered  that 
it  cannot  extend  the  field  for  investment  at  all, 
and  the  pressure  of  accumulation  upon  its 
limitations  is  constant,  because  the  field  for 
investment  is  so  narrow,  and  the  normal  ex- 
pectation of  profit  so  high.  Such  a  people, 
possessing  perhaps  great  natural  resources  in 
fertile  lands  and  mineral  deposits,  affords  a  fine 
field  for  exploitation  by  more  enterprising  na- 
tions, in  which  they  can  employ  their  surplus 
capital,  and  thus  relieve  the  home  rate  of  profit 
from  the  pressure  which,  if  unrelieved,  would 
certainly  cause  more  or  less  decline  of  indus- 
trial efforts  at  home.  Such  foreign  investments 
are  however  rarely,  if  ever,  made  unless  the 
home  government  is  able  to  extend  an  influence 
over  the  exploited  country  that  assures  to  its 
visitors  a  greater  security  than  native  enter- 
prisers formerly  enjoyed,  notwithstanding  the 
fact  that  they  already  possess  the  enormous 
advantages  over  native  competitors  conferred 
by  their  higher  civilization.  The  real  advantage 
to  a  nation  of  possessing  colonies  is  to  be  found, 
not  so  much  in  the  statistics  of  exports  and 
imports  and  the  profit  thereon,  as  in  the  ex- 
tension of  the  "  field  for  investment.'*  If  the 
funds  thus  invested  abroad  had  been  kept  at 
home,  little  or  none  of  them  would  have  been 
added  to  the   capital  fund  of   the  nation,  as 


238     Enterprise  and  Production 

unless  this  field  for  theyr  profitable  employment 
had  been  afforded  they  would  never  have  been 
accumulated  at  all,  or  indeed  produced.  They 
are  therefore  wholly  an  addition  to  the  possible 
wealth  of  the  investing  nation,  and  the  creation 
of  productive  forces  that  would  otherwise  never 
have  been  brought  into  action. 

On  the  other  hand,  it  is  of  advantage  to  a 
backward  people  to  be  exploited  by  their  richer 
and  more  civilised  neighbours,  if  they  have 
arrived  at  a  state  in  which  the  limit  of  accumu- 
lation has  been  reached.  It  would  indeed  be 
greatly  more  advantageous  to  accumulate  their 
own  capital,  and  make  room  for  it  by  develop- 
ing home  enterprise.  This  could  readily  and 
rapidly  be  accomplished,  if  they  were  so  deter- 
mined upon  it  as  to  improve  social  and  political 
conditions  and  adopt  modern  methods,  by  the 
employment  of  labour  otherwise  wasted  in 
idleness  and  by  bad  methods,  as  is  now  being 
illustrated  in  the  case  of  Japan.  A  somewhat 
slower  industrial  development  might  well  be 
more  than  compensated  for  by  the  greater  share 
in  the  resulting  benefit  obtained.  But  when 
native  initiative  cannot  be  trusted  to  bring 
about  such  a  change  in  native  habits  and  con- 
ditions, the  introduction  of  foreign  enterprise 
and  capital  is  beneficial  in  many  direct  ways, 
due  principally  to   the   action  of   the   law  of 


Capital  239 

residual  wages,  and  indirectly  in  improving 
moral  and  social  standards,  especially  affecting 
the  security  of  life  and  property,  and  raising 
the  individual  standard  of  life,  and  also,  through 
diversity  of  employment,  increasing  the  pro- 
portion of  skilled  labourers,  as  is  now  being 
exemplified  in  Egypt. 

Of  course  the  decline  in  interest  due  to  any 
decline  in  profits,  by  lessening  its  desirability, 
has  a  tendency  to  check  accumulation.  Eco- 
nomists seem  to  be  content  with  this  as  the  only 
law  regulating  accumulation,  though  it  is  incon- 
ceivable that  this  cause  could  work  quickly 
enough  to  re-adjust  the  supply  of  capital  to  the 
effectual  demand  of  enterprisers  automatically. 
But  the  other  more  important  and  more  quickly 
acting  influences,  which  have  just  been  stated, 
are  quite  generally  overlooked.  The  influence 
upon  accumulation  of  fluctuations  in  the  in- 
ducement to  save  IS  very  slight,  while  that  of 
difficulty  in  the  ability  to  save  is  very  great. 

Interest  is  by  no  means  the  only  inducement 
to  save.  To  assure  ourselves  against  poverty  in 
our  declining  years,  or  against  a  loss  in  earning 
power,  or  against  unforeseen  circumstances,  or 
to  provide  our  children  with  a  start  in  life,  are 
all  motives  to  save,  strengthened  rather  than 
weakened  by  a  decline  in  the  rate  of  interest ; 
and   if  they  should    persistently  lead  to   an 


240     Enterprise  and  Production 

accumulation  in  excess  of  the  capital  for  which 
enterprisers  could  find  profitable  employment, 
pure  interest  would  eventually  disappear. 
Gross,  or  market,  interest  might  still  be  paid 
for  loans,  but  it  would  really  be  all  a  premium 
of  insurance  and  would  contain  no  element  of 
pure  interest.  But  as  the  savings  from  these 
causes  never  have  been,  and  undoubtedly  never 
will  be,  sufficient  to  accomplish  this  in  prosper- 
ous and  progressive  communities,  the  rate  of 
pure  interest  will  be  determined  by  the  mar- 
ginal savers  among  those  who  are  induced  to 
save  by  the  desire  of  obtaining  an  income  of 
interest.  Nevertheless  the  size  of  the  first  class 
of  savers  has  a  very  pronounced  influence  upon 
the  rate  of  pure  interest,  for  the  larger  their 
accumulations  the  sooner  will  the  marginal 
saver  of  the  other  class  be  reached,  and  the 
lower  the  prevailing  rate  of  pure  interest  will  be. 
The  characteristic  of  savers,' which  is  most 
important  in  this  connection,  is  this:  That  it 
is  the  habit  of  all  consumers  to  keep  pretty 
close  to  the  standard  of  living  they  have  once 
adopted.  As  men  prosper  their  standard  will 
be  raised,  but  it  will  be  raised  gradually,  except 
perhaps  in  cases  of  unexpected  inheritance.  In 
years  when  income  is  below  the  average,  some 
economy  is  practised,  but  the  reduction  of  ex- 
penditure is  always  less  than  the  reduction  in 


Capital  241 

income.  And  when  incomes  are  unexpectedly 
large,  additional  expenditure  very  rarely  eats 
up  all,  or  even  the  greater  part,  of  the  increase. 
A  person  who  saves  little  or  nothing  during 
his  eras  of  good  fortune  is  looked  upon  as  a 
reckless  fool.  More  than  this  there  is  a  marked 
tendency  among  men  to  adopt  a  standard  of 
living  very  close  to  income,  when  the  income 
is  an  assured  one.  Families  living  wholly  on 
incomes  derived  from  permanent  investments 
seldom  add  much  to  their  accumulations,  un- 
less perhaps  we  should  except  the  very  rich, 
and  those  whose  property  is  in  real  estate 
situated  where  the  value  of  real  property  is 
rapidly  appreciating.  In  proportion  to  its  aver- 
age amount,  the  more  variable  and  uncertain 
an  income,  the  more,  as  a  rule,  will  be  saved 
from  it  in  the  long  run,  and  it  follows,  there- 
fore, that  profit  being  much  the  more  variable 
form  of  income,  must  yield  the  largest  propor- 
tion for  accumulation.  And,  as  a  matter  of 
fact,  nearly  all  great  fortunes  have  originated 
mainly  from  profit,  especially  from  profits  ob- 
tained through  the  appropriation  of  opportuni- 
ties. But  the  savings  from  profit  are  not  only 
proportionally  great,  but  are  also  exceptionally 
spasmodic.  The  point  of  the  argument  is  this: 
that  the  regulation  of  accumulation,  and  the 
re-adjustment  of  capital  when  superabundant, 

z6 


242     Enterprise  and  Production 

do  not  depend  so  much  upon  the  will,  as 
upon  the  ability.  More  is  added  to  capital  in 
good  than  in  hard  times,  not  because  men  are 
more  anxious,  but  because  they  are  more  able 
to  save.  The  corrective,  therefore,  acts  auto- 
matically, but  it  is  somewhat  retarded  in  its 
action  by  the  fact  that  enterprisers,  being  more 
sanguine  in  good  times,  search  more  eagerly 
for  new  employments,  thus  widening  the  field 
for  investment  and  absorbing  accumulated  sav- 
ings and  postponing  the  time  when  capital 
becomes  redundant,  and  the  slackening  of 
enterprise  when  times  are  hard,  by  discourag- 
ing investment  in  fixed  forms,  correspondingly 
retards  recovery. 

The  writer  remembers  that  in  his  youth  the 
stock  editorial  treating  of  hard  times  always 
attributed  them  to  previous  extravagance  and 
impairment  of  capital,  ignoring  the  facts  that  in 
such  times  there  appeared  to  be  a  glut  of  al- 
most every  kind  of  consumable  goods,  that 
many  factories  were  idle,  that  the  rate  of  inter- 
est was  low,  and  business  failures  prevalent, 
showing  of  course  a  decline  in  profits,  all  of 
which  circumstances  are  irreconcilable  with  an 
impaired  capital.  At  present  we  do  not  often 
chance  upon  similarly  absurd  statements,  so 
contradictory  to  the  most  casually  observed 
facts,  but  I  fear  that  economists,  as  a  rule,  yet 


Capital  243 

consider  the  congestion  of  commodities  in 
times  of  stagnation  as  due  to  the  character 
of  the  supply  rather  than  to  the  character  of 
the  demand.  That  the  true  explanation  is 
to  be  found  in  demand  becomes  self-evident, 
when  we  consider  the  matter  from  the  stand- 
point of  the  enterpriser,  thus  affording  another 
example  of  its  being  the  only  one  from  which 
economic  phenomena  can  be  clearly  perceived 
and  properly  grouped.  The  supply  of  com- 
modities is  of  course  the  demand  for  them, 
but  when  part  of  the  demand  only  is  for  con- 
sumption and  the  other  part  for  retention,  it 
is  evident  that  an  additional  accumulation,  ex- 
actly equal  to  the  latter  demand,  must  result 
and  can  theoretically  proceed  to  a  point  where 
more  of  each  kind  of  commodity  is  accumu- 
lated than  enterprisers  can  profitably  invest  in 
"  fixed  "  forms,  that  is  in  things  to  be  used  and 
not  consumed  in  production,  or  add  to  their 
stocks  in  trade,  until  there  has  been  a  growth  of 
population,  or  a  widening  of  the  field  for  in- 
vestment, necessarily  slow  processes,  which  en- 
terprisers cannot  afford  to  wait  for.  When 
we  have  once  recognised  the  enterpriser's  ne- 
cessities as  paramount,  we  cannot  fafl  to  per- 
ceive that  he  is  periodically  forced  to  create 
a  situation  in  which  further  accumulation 
will    be    checked,   and    in    which    sometimes 


244    Enterprise  and  Production 

pre-existing  accumulations  will  be  somewhat 
impaired. 

I  may  be  pardoned  in  this  connection  for 
calling  attention  to  the  above  argument  as 
emphasising  the  fact,  elsewhere  claimed,  that 
the  subsidiary  productive  factors  have  no  direct 
relation  with  each  other — such  inter-relations 
as  exist  being  always  indirectly  set  up  through 
enterprise.  Any  change  in  the  amount  of  any 
one  of  the  three  factors,  or  in  the  amount  of 
the  reward  obtainable  from  it,  must  first  affect 
profits,  and  the  consequent  change  in  profits 
and  enterprise  will  then  transmit  the  influence 
to  the  other  two  subsidiary  factors.  If  capital 
really  employed  labour,  as  is  so  often  asserted 
to  be  the  case,  the  more  capital  the  more 
employment ;  but  as  it  is  the  enterpriser  who 
employs  labour,  the  true  statement  is,  the  more 
enterprise  the  more  employment.  It  is  when 
profits  are  large  that  enterprisers  bid  eagerly 
for  labour,  but  profits  are  only  high  when  fin- 
ished goods  are  in  active  demand  and  bringing 
high  prices,  which  cannot  be  the  case  when  the 
amount  of  finished  goods  carried  in  stock  by 
merchants,  and  goods  in  process  in  the  hands 
of  the  manufacturers,  are  relatively  large — 
which  is  to  say  when  the  aggregate  of  **  circu- 
lating capital  "  is  greater  than  usual. 

The  theory  here  advanced,  as  to  the  func- 


Capital  245 

tions  of  capital  and  the  limitations  to  its  ac- 
cumulation, are  not  in  accord  with  commonly 
accepted  views,  and  the  persistence  with  which 
the  theory  of  a  general  glut  keeps  bobbing  up 
has  been  a  subject  of  amusement  to  well-regu- 
lated economists,  and  it  must  be  confessed  that 
it  has  not  always  been  supported  by  very  lucid 
or  convincing  arguments.  The  theory  is  of 
course  unassailable  that  the  supply  of  commod- 
ities is  exactly  what  constitutes  the  effectual 
demand  for  commodities,  and  that,  if  any  com- 
modities are  unsaleable,  it  is  not  because  the 
purchasing  power  necessary  to  obtain  them  is 
lacking,  but  because  they  are  not  the  com- 
modities wanted,  by  those  who  possess  the  neces- 
sary power  to  purchase.  This  theory  however, 
while  not  at  all  inconsistent  with  the  existence 
of  periods  of  industrial  stagnation,  fails  to  ex- 
plain them.  Why  it  is  that  at  certain  periods 
there  appear  to  be  so  many  more  unsaleable 
misfits  than  at  others,  and  how  such  maladjust- 
ment is  rectified,  are  questions  that  economists 
have  hardly  attempted  to  answer,  but  which 
we  are  inevitably  led  to  inquire  into  when  we 
have  once  adopted  enterprise  as  the  standpoint 
from  which  to  view  the  field  of  Economics, 
with  the  somewhat  astonishing  results  that  a 
general  glut  becomes  a  theoretic  possibility, 
and  that  capital  can  be  temporarily  redundant 


246    Enterprise  and  Production 

in  the  sense  of  being  of  greater  amount  than 
enterprisers  can  find  an  immediately  profitable 
use  for. 

I  hope  no  one  will  pervert  my  meaning  by 
claiming  that  the  logical  result  of  this  theory 
of  the  periodic  pressure  of  accumulation  upon 
its  limitations  would  be  the  discouragement  of 
saving  and  frugality.  On  the  contrary  it  seems 
to  the  writer  that,  within  certain  limits  not 
likely  to  be  transgressed,  the  greater  this  pres- 
sure in  any  community  the  more  rapidly  will 
not  only  its  aggregate  wealth,  but  also  its 
yearly  aggregate  of  income  increase.  The  lim- 
its to  accumulation  are  elastic  and  they  are 
stretched  a  little  further  by  each  recurrent 
pressure,  so  that,  at  the  end  of  each  cycle  of 
activity  and  stagnation,  the  community  finds 
itself  in  possession  of  a  greater  amount  of 
capital  per  capita  that  enterprisers  are  able  to 
find  a  profitable  use  for.  Without  this  recur- 
rent pressure  progress  would  cease,  and  has 
ceased  for  some  peoples  for  lack  of  it.  All  our 
theory  points  out  is  that  a  price  has  to  be  paid 
for  the  ultimate  benefit  in  the  loss  of  produc- 
tive force  during  the  period  of  readjustment — 
a  loss  the  reality  of  which  we  have  recurrent 
evidence  of,  but  which  is  not  satisfactorily 
explained  by  the  present  conception  of  the 
Productive  Process. 


Capital  247 

The  standpoint  of  enterprise  aiso  affords  us 
some  insight  into  the  theory  of  interest.  When 
an  individual  loans  his  capital  to  an  enterpriser 
on  ample  security,  what  is  it  he  foregoes  ?  If 
he  keeps  it  himself  he  will  be  forced  to  perform 
the  function  of  enterpriser  as  well  as  the  func- 
tion of  capitalist.  If  he  decides  to  make 
the  loan,  he  abdicates  the  former  function 
to  one  who  is  supposedly  more  efficient  as 
an  enterpriser,  and  for  that  reason  is  willing  to 
pay  him  more  than,  all  things  considered,  he 
could  obtain  by  retaining  the  responsibilities  of 
production.  But  the  assumption  of  responsi- 
bility implies  the  possibility  of  loss  as  well  as 
of  gain,  and  the  less  confidence  a  capitalist  has 
in  his  ability  to  employ  capital  successfully,  and 
the  less  inclination  he  has  to  lead  an  active 
business  life,  the  more  willing  he  will  be  to 
loan  his  capital  to  another.  There  is  even  a 
class  of  capitalists,  composed  of  those  who  are 
aware  of  their  inability  to  engage  in  business 
for  themselves  with  any  prospect  of  success,  or 
who  are  incapacitated  by  sex  or  as  minors  or 
by  ill  health,  who,  rather  than  employ  their 
own  capital,  would,  if  it  were  necessary,  pay 
others  something  for  keeping  their  wealth  in- 
tact. The  amount  they  would  pay  would  of 
course  be  limited  by  the  natural  risk  of  deteri- 
oration and  the  risk  and  expenses  attendant 


248    Enterprise  and  Production 

upon  retaining  their  wealth  as  a  hoard.  There 
is  also  another  class,  namely  trustees,  who  are 
limited  by  law  as  to  the  character  of  their  in- 
vestments, and  to  whom  security  is  the  main 
object,  to  attain  which  all  interest  would  be 
foregone,  if  that  were  absolutely  necessary. 
Above  these  there  are  of  course  all  grades  of 
loaners  until  we  come  to  the  marginal  loaner, 
who  is  hesitating  whether  to  loan  his  capital  at 
the  prevailing  rate  of  interest,  or  to  employ  it 
in  his  own  undertakings.  Now  when  confi- 
dence in  the  future  is  prevalent,  hopes  are  high, 
and  the  spirit  of  enterprise  is  abroad,  the  mar- 
ginal loaner  will  evidently  incline  to  keep  his 
capital  and  employ  it  himself,  unless  he  can 
obtain  more  interest  than  would  have  pre- 
viously been  satisfactory  to  him.  But  if  his 
chances  as  an  enterpriser  have  been  improved, 
so  have  the  chances  of  those  who  are  yet  better 
enterprisers  than  he,  and  they  will  be  willing 
to  pay  him  more  than  before  for  the  control  of 
his  capital,  and  the  rate  of  interest  will  rise. 
And  the  contrary  will  happen  when  the  busi- 
ness outlook  is  less  promising  than  it  has  been. 
The  marginal  loaner,  on  whose  decision  the 
rate  of  interest  depends,  need  not  of  course  be 
a  single  person,  or  a  single  class  of  persons. 
The  greater  number  of  capitalists  employ  a 
part  of  their   capital   themselves,  and   lend   a 


Capital  249 

part  of  it  to  others,  and  the  proportions  into 
which  they  divide  their  capital  between  them- 
selves and  others  is  the  real  determinant  of  the 
rate  of  interest.  So  while,  as  we  have  already 
seen,  the  supply  of  capital  exactly  constitutes 
the  demand  for  capital,  the  supply  of  capital 
its  owners  do  not  wish  to  employ  themselves, 
that  is,  what  is  commonly  spoken  of  as  "  loan- 
able funds,"  can  vary  from  the  demand  for 
loanable  funds,  at  the  rate  of  interest  obtaining 
at  the  time. 

When  the  enterpriser  sells  a  commodity  to 
the  final  consumer,  the  commodity  in  passing 
from  his  hands  ceases  to  be  an  embodiment  of 
economic  capital,  though  it  may  persist  for  a 
while  as  individualistic  capital  goods  before  dis- 
appearing altogether.  The  total  amount  of 
economic  capital  is  increased  by  whatever 
enterprisers  produce  and  decreased  by  the 
exact  value  of  the  commodities  that  the  con- 
sumers have  acquired.  The  amount  of  capital 
and  the  amount  of  capital  goods  always  coin- 
cide, because,  though  capital  is  not  an  aggre- 
gate of  capital  goods,  it  is  the  aggregate  of 
their  power  to  purchase,  In  return  for  the 
capital  destroyed,  the  enterpriser  receives  in- 
deed either  another  pre-existing  commodity, 
or  some  sort  of  a  claim  on  commodities  in 
general,  either  as  money  or  balance  in  bank  or 


250    Enterprise  and  Production 

cancelling  of  indebtedness,  but  the  transaction 
taken  by  itself  involves  a  destruction  of  eco- 
nomic capital  exactly  equal  to  the  value  of  the 
final  consumer's  purchase.  It  is  through  this 
process  that  capital  is  continually  disappearing. 
If  the  final  consumer  does  not  come  forward  to 
absorb  capital  goods  as  fast  as  they  are  created 
by  enterprise,  accumulation  of  course  results, 
and  the  greater  the  accumulation  the  less  the 
incentive  to  the  enterpriser  to  continue  his 
production.  He  will  prefer  to  loan  rather  than 
to  employ  part  at  least  of  what  the  final  con- 
sumer has  paid  him,  or,  what  is  the  same  in 
effect,  he  will  apply  his  receipts  to  lessening  his 
indebtedness  rather  than  in  the  employment  of 
labourers.  The  marginal  loaner  will  be  repaid 
and  will  not  be  able  to  find  a  borrower  who 
will  pay  his  marginal  rate  of  interest,  and  will 
therefore  be  obliged  to  keep  his  capital  and  to 
assume  the  responsibility  of  its  employment. 
He  is  forced  therefore  to  change  his  position 
from  that  of  marginal  loaner  to  that  of 
marginal  enterpriser,  and  other  capitalists, 
willing  to  accept  a  lower  rate  of  interest,  will 
become  the  marginal  ones.  This  decrease  in 
the  supply  of  and  demand  for  loanable  funds 
always  manifests  itself  in  a  coincident  decrease 
of  both  the  deposits  and  loans  of  banks. 

The  amount  of  economic  capital  which  enter* 


Capital  251 

prisers  must  either  own  or  borrow  is  then  al- 
ways exactly  equal  to  the  amount  of  unsold 
commodities,  and  the  amount  of  loanable  funds 
exactly  equal  to  the  amount  which  enterprisers 
are  forced  to  borrow  at  some  rate  of  interest, 
which  rate  fluctuates  with  the  varying  propor- 
tion in  which  individual  capitalists  are  will- 
ing to  act  as  enterprisers  also.  There  is,  how- 
ever, a  notable  complication,  furnished  by 
money,  by  which  is  here  meant  gold,  silver, 
bank-notes,  and  government  notes,  or  in  other 
words  the  currency.  If  we  consider  the  enter- 
priser employing  his  own  capital  as  borrowing 
from  himself,  the  supply  of  loanable  funds  con- 
sists of  all  the  saleable  goods  of  a  country  plus 
its  circulating  medium  ;  and  the  demand  for 
loanable  funds,  of  all  the  saleable  goods  plus  the 
currency  the  people  elect  to  keep  in  their 
tills  and  pockets  for  their  own  convenience, 
and  the  amount  the  banks  desire  as  a  reserve 
fund.  When  bank  loans  decrease  it  is  because 
certain  marginal  loaners  have  been  driven 
into  the  position  of  marginal  enterprisers,  and 
therefore  a  smaller  sum  is  required  for  bank 
reserves,  at  the  same  time  that  a  larger  sum  of 
the  circulating  medium  accumulates  in  the 
banks,  owing  to  the  fact  that  individuals  as  a 
rule  will  carry  less  money  in  their  pockets,  and 
business  firms  less  in  their  cash  drawers,  when 


252    Enterprise  and  Production 

profits  are  low  and  business  poor.  The  efforts 
of  the  banks  to  loan  their  surplus  funds  lead 
of  course  to  a  reduction  in  interest  charges, 
which  is  accentuated  by  the  fact  that,  in  such 
times,  more  and  better  collateral  is  required, 
thus  reducing  the  number  of  those  able,  as  well 
as  of  those  willing,  to  borrow. 

The  machinery  by  which  the  rate  of  interest 
is  regulated  is  undoubtedly  afforded  by  the 
circulating  medium,  but  it  is  the  machinery 
merely;  the  real  cause  of  fluctuations  in  the 
rate  must  be  looked  for  in  the  causes  which 
bring  it  about — that  more  capital  is  employed 
by  its  owners,  and  that  less  money  is  kept  in 
the  pockets  and  tills  of  the  people — as  these 
facts  are  what  ultimately  determine  the  surplus 
of  the  banks,  to  get  which  loaned  out  is  the 
proximate  cause  of  the  lowering  of  the  interest 
rate.  The  ultimate  cause  is  of  course  a  decline 
in  ordinary  business  profits. 

Money,  considered  as  a  commodity,  pos- 
sesses a  characteristic  peculiar  to  itself  in 
that  it  is  the  only  one  from  whose  retention  no 
economic  profit  can  be  gained.  The  gain  in 
convenience,  in  having  a  certain  amount  on 
hand,  is  a  purely  individualistic  one,  and  the 
loss  of  interest  on  "  cash  on  hand  "  does  not 
appear  as  an  element  of  the  cost  of  any  product. 
Cash  is  not    "  held  for  a  market, "  at  least  in 


Capital  253 

the  same  sense  that  other  commodities  are, 
even  when  possessed  of  intrinsic  value,  like 
gold  and  silver  coins ;  it  is  rather  a  claim 
on  commodities  in  general  than  a  commodity 
itself. 

The  objections  raised  in  some  quarters  to 
what  is  known  as  "the  use  or  productive 
theory  of  capital  and  interest"  have  this 
foundation,  that,  in  the  truer  sense  of  the 
term,  capital  is  not  in  itself  productive,  but 
only  a  means  of  production.  It  is  however 
productive  in  exactly  the  same  sense  that 
labour  and  opportunity  are.  Enterprise,  the 
only  really  productive  force,  pays  interest, 
wages,  and  rentals  for  similar  reasons, — to  ob- 
tain in  each  case  an  essential  means  of  produc- 
tion. If  rent  can  be  said  to  be  paid  on  account 
of  the  productivity  Of  land,  wages  on  account 
of  the  productivity  of  labour,  interest  is  certainly 
paid  on  account  of  the  productivity  of  capital. 
It  supplies  to  the  enterpriser,  as  they  do,  an 
essential  of  production.  This  essential  con- 
sists in  relations  of  time,  without  the  power  to 
establish  which  the  production  of  exchangeable 
or  any  other  commodities  would  be  impossible. 
This  possibility  is  afforded  by  refraining,  or 
abstinence,  on  the  part  of  the  capitalist,  and 
the  marginal  abstainer  must  be  actuated  by  an 
expectation  of  a  future  reward  for  his  present 


254    Enterprise  and  Production 

self-denial.  This  future  reward  may  be  found 
either  in  the  quality,  on  in  the  quantity,  of  the 
purchasing  power  of  the  saved  commodity  it 
represents.  If  the  need  the  commodity  is 
qualified  to  satisfy  is  expected  to  be  more 
urgent  in  the  future,  the  commodity  will  be 
hoarded  for  that  cause  alone.  But  if  the  pur- 
chasing power  that  comes  into  being  coinci- 
dently  with  the  commodity  can  be  expected 
to  increase  with  time  if  judiciously  employed, 
it  will  be  unexpended  when  the  inducement  is 
sufficient.  This  expectation,  which  is  that  of 
the  marginal  saver,  is  founded  entirely  upon 
the  enterpriser's  expectation  that  he  can  make 
a  profit  by  holding  an  equal  amount  of  "  capi- 
tal goods."  It  is  therefore  time  relations  only 
which  capital  creates,  and  it  is  literally  time 
which  the  enterpriser  pays  for.  And  this  seems 
to  supply  us  with  a  reconciliation  between  the 
"  time "  and  the  "  use,"  or  "  productive," 
theories  of  interest. 

As  this  chapter  is  likely  to  arouse  more  or 
less  protest,  it  is  advisable,  for  the  purpose  of 
being  better  understood  by  some  economists, 
to  consider  further  the  content  of  the  term 
*'  capital "  as  a  composition  of  material  things. 
Another,  and  to  my  mind  better,  conception  of 
capital  as  a  fund,  has  been  advanced  as  an 
alternative  use  of  the  word.     As  I  understand 


Capital  255 

the  matter,  this  fund  is  regarded  as  a  simultane- 
ously increasing  and  decreasing  aggregate  of 
"  capital  goods,"  or  saleable  commodities.  It 
has  an  entity  of  its  own,  not  disturbed  or 
affected  by  any  change  in  the  material  objects 
possessed  of  value,  so  long  as  the  aggregate  re- 
mains the  same.  Are  these  two  conceptions  of 
capital  mutually  exclusive,  or  merely  different 
aspects  of  the  same  thing?  There  can  be  no 
question  as  to  the  validity  of  the  conception 
of  capital  as  a  fund.  Is  the  concept  of  it  as  an 
aggregate  of  material  things  equally  sound  ?  Are 
such  things  as  "  capital  goods  "  properly  con- 
sidered and  spoken  of  as  capital  ?  Purchasing 
power  must  have  some  material  representation 
somewhere,  and  the  only  way  a  saving  can  be 
effected  is  by  the  retention  of  some  material 
thing.  But,  paradoxical  as  it  may  be,  the  ma- 
terial thing  saved  is  never  in  the  possession  of 
the  saver  as  an  economic  capitalist.  Indeed 
it  is  not  quite  correct  in  economic  discussion  to 
speak  of  a  material  thing  as  **saved."  An  indi- 
vidualistic producer  can  indeed  abstain  from 
using  the  very  thing  he  has  produced,  but 
there  is  no  abstinence  at  all  on  the  part  of  the 
economic  producer  when  he  retains  posses- 
sion of  an  article  he  has  produced.  The  enter- 
priser never  retains  possession  of  an  article 
longer  than  he  is  forced  to,  and  a  forced  and 


256    Enterprise  and  Production 

unwilling  retention  cannot  fitly  be  spoken  of 
as  a  meritorious  abstinence  that  must  be  re- 
warded. This  retention  of  what  he  has  pro- 
duced instead  of  earning  a  reward  is  penalised, 
and  by  increasing  his  cost  of  production  re- 
duces the  profit  of  an  enterpriser,  unless  he 
IS  able  to  increase  his  selling  price  correspond- 
ingly. The  real  earner  of  the  reward  of  ab- 
stinence in  economic  production  neither  saves 
nor  can  save  any  material  thing  at  all,  for  in 
his  character  of  final  consumer  he  cannot  pos- 
sess any  material  thing  that  has  not  already 
passed  out  of  the  domain  of  Economics, 
through  its  loss  of  exchangeability.  What  the 
economic  abstainer  abstains  from  is  merely  the 
exercise  of  a  part  of  the  abstract  power  to  pur- 
chase which  has  come  into  his  possession.  It 
is  not  quite  correct  to  speak  of  him  as  an 
abstainer ;  **  refrainer  *'  is  the  better  word. 
We  abstain  from  using  some  particular  thing ; 
we  refrain  from  the  exercise  of  a  power.  We 
can  hardly  speak  of  abstaining  from  something 
not  in  our  possession.  When  the  final  con- 
sumer comes  into  possession  of  a  commodity, 
he  can  abstain  from  consuming  it,  but  it  re- 
mains "  consumer's  goods  "  so  long  as  he  holds 
on  to  it  himself.  It  is  an  item  of  individualistic 
capital  and  can  only  become  economic  capital 
goods  by  being  again  put  on  the  market,  and 


Capital  257 

it  is  then  in  the  hands  of  the  enterpriser.  The 
function  of  the  capitalist  is  refraining;  the 
retaining  is  done  by  the  enterpriser  as  an 
incident  of  his  special  function  of  ownership. 
The  circumstance  that  the  abstainer  or  refrainer 
as  such  is  necessarily  a  different  person  from 
the  retainer  as  such,  and  exercises  a  different 
function,  seems  to  have  been  wholly  over- 
looked in  economic  discussion. 

The  actual  possession  and  ownership  of  all 
material  things  is  a  function  of  the  enterpriser, 
and,  as  we  have  seen  elsewhere,  his  reward  for 
conserving  them  is  not  interest  but  profit.  Any 
change  in  the  value  of  property  held  for  sale 
accrues  as  profit  or  loss.  But  if  capital  is  ^n 
aggregate  of  material  things,  the  income  arising 
from  their  retention  should  be  interest.  Again, 
we  speak  of  capital  as  invested  in  such  and  such 
material  commodities ;  but  it  cannot  itself  be  the 
things  in  which  it  is  invested.  Capital  is  not 
then  a  part,  or  kind,  of  wealth  as  the  old  defini- 
tions have  it,  but  a  fund  of  unexpended  powerof 
purchasing,  consisting  of  a  mere  claim  on  wealth 
in  general,  due  to  the  fact  that  the  claimant  was 
the  originator,  or  the  representative  of  the  origi- 
nator, of  the  initial  abstinence  or  refraining  from 
the  use  of  purchasing  power  which  enabled  him- 
self acting  as  an  enterpriser,  or  some  other 
enterpriser,  to  retain  commodities  possessed  of 


258    Enterprise  and  Production 

an  equal  amount  of  purchasing  power.  Re- 
fraining is  rewarded  by  interest ;  retaining  by 
profit  or  rental,  according  as  the  thing  retained 
is  for  a  nnarket  or  for  use. 

But  "  fixed  capital "  and  land  and  all  other 
opportunities,  at  their  capitalised  value,  are  also 
constituents  of  wealth,  and  the  capitalist,  as 
such,  has  exactly  the  same  claim  upon  them 
that  he  enforces  upon  all  wealth  consisting  of 
saleable  material  things,  and  he  is  paid  interest 
for  delaying  to  foreclose  his  mortgage  when  he 
has  loaned  upon  them  as  security.  Those  who 
are  endeavouring  to  persuade  us  that  every- 
thing, whose  value  or  selling  price  can  be  capi- 
talised, is  capital,  have  this  in  their  favour,  that 
if  any  kind  of  material  thing  is  capital  every 
other  species  of  material  wealth  must  also  be 
regarded  as  capital,  as  well  as  all  immaterial 
rights  and  perquisites  that  have  a  selling  price. 
Rightly  considered,  what  earns  interest,  and 
what  is  therefore  capital,  is  not  any  species  of 
material  wealth  at  all,  but  the  claim  to  so  much 
purchasing  power  (expressible  in  a  common  de- 
nominator agreed  upon)  as  was  possessed  by 
the  material  wealth  transferred  at  the  time  of 
its  delivery.  Capital  is  therefore  a  sum  of  ab- 
stract purchasing  power  held  in  abeyance,  and 
capable  of  being  transferred  for  the  considera- 
tion of  a  percentage  of  itself  in  addition  to  the 


Capital  259 

eventual  return  of  the  principal.  When  the 
borrower  invests  this  purchasing  power  in  con- 
sumable goods  held  for  sale,  interest  is  a  cost 
for  which  he  expects  to  more  than  recoup  him- 
self out  of  the  difference  between  purchase  and 
selling  price.  And  exactly  the  same  thing  is 
true  when  he  invests  his  abstract  purchasing 
power  in  land  or  any  form  of  "fixed  capital," 
except  that  here  he  expects  his  interest  cost  to 
be  more  than  made  up  to  him  in  the  rent  ob- 
tained. But  the  difference,  the  all-important 
difference,  is  here,  in  that  the  interest  paid  the 
capitalist  when  the  borrowed  purchasing  power 
is  invested  in  goods  used  up  is  an  element  in 
the  cost  of  the  product,  while  it  is  not  an  ele- 
ment of  the  enterpriser's  cost  of  production 
when  the  borrowed  purchasing  power  is  invested 
in  land  or  any  form  of  fixed  capital,  because  they 
are  used  only  as  means  and  are  not  used  up. 
Strictly  speaking  the  enterpriser,  as  such,  is  pre- 
cluded from  investing  his  borrowed  capital  in 
land  or  "  fixed  capital "  because  then  he  be- 
comes the  owner  of  an  opportunity,  whereas 
theoretically  and  as  such  he  can  only  be  a  user, 
and  obligated  to  the  real  owner,  whether  him- 
self or  another,  for  the  value  of  the  use,  which 
is  to  him  a  cost  entering  into  the  final  value  of 
his  product. 

Land,  mines,  and  other  limited  natural  forces 


26o    Enterprise  and  Production 

which  can  be  appropriated,  preserve  themselves, 
but  their  retention  by  a  present  owner  demands 
abstinence  on  his  part.  All  opportunities  cre- 
ated by  man  are  both  obtained  and  preserved 
by  abstinence.  The  continued  existence  and 
usefulness  of  opportunities  involves  therefore  the 
establishment  of  time  relations  for  their  uses  to 
be  effective.  Nevertheless  they  cannot  on  this 
account  be  considered  as  capital,  when  the  term 
is  defined  by  its  relations  to  the  enterpriser, 
because  here  it  is  not  the  time  relations,  but  the 
uses  for  which  the  enterpriser  pays.  So  far  as 
an  opportunity  is  appropriated,  and  not  created 
by  an  investment  of  capital,  this  is  very  plain. 
And  it  should  be  equally  plain  for  that  part  of 
opportunities  not  appropriated.  Purchasing 
power,  which  is  what  the  enterpriser  borrows 
of  the  capitalist,  once  invested  and  embodied 
in  either  material  commodities  or  as  fixed  capi- 
tal, loses  its  abstract  quality  until  again  released 
and  made  abstract  by  a  sale.  During  the  inter- 
val it  is  not  subject  to  the  laws  of  interest  but 
to  the  laws  of  profit  and  loss,  so  far  as  the  value 
of  the  commodities  or  opportunities  held  for 
sale  fluctuates,  and  to  the  laws  of  rent  so  far  as 
the  value  of  the  use  of  the  facilities  for  produc- 
tion in  which  capital  is  invested  changes. 

At  this  time  when  complaints  of  injustice  to 
labour  are  so  rife,  it  is  somewhat  singular  that  a 


Capital  261 

real  cause  of  great  injustice  to  all  classes  but 
capitalists  has  been  overlooked.  I  refer  to  the 
existence  of  public  indebtedness.  The  prin- 
ciples here  advanced  make  it  very  plain  that 
the  interest  paid  on  public  debts  is  almost 
wholly  an  addition  to  interest  at  the  expense 
of  other  forms  of  income.  Perhaps  wholly  so, 
for  what  portion  of  it  is  paid  by  taxation  on 
capital  is  probably  recouped  by  a  corresponding 
increase  in  the  rate  of  pure  interest.  Manifestly 
the  field  for  investment,  and  therefore  the  total 
amount  of  capital  that  can  be  accumulated,  is 
widened  by  the  exact  amount  of  the  national 
or  municipal  indebtedness  of  a  nation,  without 
any  increase  of  its  productive  power.  While 
the  total  annual  product  is  unaffected,  the 
portion  of  it  obtained  by  capital  is  greater  by 
exactly  the  amount  of  interest  paid  on  public 
debts  incurred  for  unproductive  purposes. 

When  Jay  Cooke  spoke  of  a  national  debt  as 
a  national  blessing,  he  was  very  probably  influ- 
enced by  an  intuition  which  he  did  not  himself 
understand.  The  creation  of  such  debts  is  a 
temporary  benefit,  and  this  is  what  he  perceived 
without  comprehending  why.  The  reason,  of 
course,  is  that  by  widening  the  field  for  invest- 
ment they  act  as  a  stimulus  to  industry  in  the 
way  here  pointed  out.  Like  other  energy  due 
to  stimulants,  this  has  to  be  paid  for  by  a  cor- 


262     Enterprise  and  Production 

responding  depression  of  industry  due  to  forcing 
capital  towards  the  limit  of  accumulation,  when 
the  debt  is  paid  off.  In  the  end,  therefore, 
nothing  is  gained  from  this  cause,  while  all  the 
interest  charges  paid  are  a  tax  upon  other 
forms  of  income  for  the  exclusive  benefit  of 
capitalists.  The  only  possible  excuse  therefore 
for  the  creation  of  public  debt  is  to  help  the 
nation  over  a  critical  period,  just  as  a  stimulant, 
which  harms  rather  than  benefits,  will  yet 
sometimes  pull  the  taker  through  a  difficult 
situation. 

The  prevalent  idea  that  the  creation  of  a 
public  debt  transfers  to  posterity  a  part  of  the 
burden  imposed  by  a  war  or  other  great  exi- 
gency is  well  founded,  and  it  is  just  and  fair  that 
such  burdens  should  be  so  distributed ;  but  the 
end,  however  justifiable,  is  only  obtainable  by 
a  disturbance  of  distribution  between  the  pro- 
ductive factors,  which  is  far  from  being  just 
and  equitable,  and  which  therefore  demands 
readjustment  as  soon  as  practicable.  While 
public  indebtedness  is  justifiable  as  a  temporary 
expedient,  the  "  funding  "  of  pubHc  indebted- 
ness— that  is  converting  it  into  a  permanent 
obligation — is  to  establish  a  permanent  injustice 
to  labourers.  These  remarks  do  not,  of  course, 
apply  to  public  indebtedness  incurred  for  pro- 
ductive purposes,  as  such  debts  are  really  social 


Capital  263 

investments  and  earn  for  the  public,  either  in 
lessened  taxation  or  social  betterments,  all  or 
more  than  the  interest  charges;  and  as  they 
necessarily  supplant  about  an  equal  amount  of 
private  capital  the  labourers'  proportion  of  the 
product  is  not  necessarily  affected. 

Some  words  of  caution  are  again  advisable 
to  prevent  a  possible,  or  perhaps  probable,  mis- 
conception of  the  author's  theories  as  unduly 
exalting  the  economic  function  and  position  of 
the  Enterpriser.  When  Enterprise  is  spoken  of 
as  the  dominant  function  no  return  is  intended 
to  the  old  and  discarded  theory  of  the  Physio- 
crats and  Mercantilists,  that  the  "  surplus  "  is 
the  proper  object  of  industrial  efforts,  and  that 
nations  are  well  off  economically  in  proportion 
to  its  amount.  This  term  is  susceptible  of 
several  meanings,  not  always  carefully  dis- 
tinguished. When  by  "  surplus."  is  meant  the 
difference  between  what  a  nation  annually  pro- 
duces and  what  it  consumes,  or  in  other  words 
the  annual  national  savings,  it  is  indeed  true 
that  the  greater  their  amount  the  more  rapidly 
does  the  accumulated  wealth  of  the  country 
increase.  The  fallacy  here,  as  we  have  already 
seen,  lies  in  the  tacit  assumption  that  the 
annual  national  surplus  can  be  increased  by 
parsimony,  by,  that  is,  an  unwise  and  niggardly 
contraction  of  consumption.    Carried  beyond  a 


264    Enterprise  and  Production 

certain  point,  national  parsimony  defeats  itself 
by  restricting  production  as  much  as,  or  more 
than,  it  decreases  consumption.  Nations  are 
really  prosperous  not  in  proportion  to  the 
growth  of  their  accumulated  wealth,  but  in 
proportion  to  their  ability  to  consume  without 
depriving  themselves  of  any  available  facilities 
for  producing.  The  only  economic  justification 
of  saving  is  to  provide  such  facilities  in  such 
amount  as  the  field  for  investment  allows.  Up 
to  that  amount  saving  eventuates  an  ultimate 
increase  in  consumption,  due  to  an  increase  in 
the  amount  produced.  That  amount  exceeded, 
production  declines  and  possible  consumption 
of  course  declines  along  with  it,  according  to 
the  theories  here  advanced,  which  manifestly 
differ  more  radically  from  the  Physiocratic  and 
Mercantile  views  about  the  "  surplus,"  in  this 
sense  of  the  term,  than  does  the  conception  of 
the  productive  process  now  prevalent,  which, 
apparently  at  least,  regards  accumulation  as  an 
end  in  itself,  and  as  restricted  only  by  a  decline 
in  the  rate  of  interest,  whereas  our  theories 
regard  accumulation  simply  as  a  means,  re- 
stricted in  amount,  as  all  means  necessarily  are 
restricted,  by  the  amount  of  the  uses  to  which 
it  can  be  put. 

The  Physiocrats  and  Mercantilists  were  not 
over-precise   in    their   definitions   of  the   term 


Capital  265 

"  surplus."  The  underlying  idea  seems  to  be 
that  it  was  the  difference  between  the  cost  of 
a  thing  and  its  value,  or  in  other  words  the 
unpredetermined  residue  now  spoken  of  as 
profit.  Looking  upon  what  the  nation  con- 
sumed as  the  cost  of  what  it  produced,  they 
regarded  the  difference  as  the  national  profit. 
Rightly  enough,  though  perhaps  unconsciously, 
regarding  the  expectation  of  profit  as  the  sole 
incentive  to  production,  they  very  erroneously 
inferred  that  the  greater  the  annual  savings  the 
greater  the  incentive  to  production.  Two 
errors  are  involved  in  this  chain  of  reasoning. 
The  national  expenditure  is  no  more  a  measure 
of  the  national  cost  of  production  than  the 
total  industrial  and  personal  expenditure  of  an 
enterpriser  is  a  measure  of  what  it  costs  him  to 
bring  his  product  to  market.  The  cost  of 
production  to  an  economic  enterpriser  is  the 
purchasing  power  he  parts  with  in  interest, 
rent,  and  wages,  and  foregoes  on  such  of  his 
own  capital,  land,  and  labour  as  he  devotes  to 
his  business.  In  individualistic  and  social  pro- 
duction the  cost  cannot  indeed  be  measured  in 
purchasing  power,  but  it  is  still  what  is  ex- 
pended or  foregone — what  utilities  might  have 
been  retained  or  obtained  in  place  of  the  utility 
actually  created.  As  the  utility  difference  be- 
tween what   a  nation   actually  produces,  and 


266    Enterprise  and  Production 

what  it  might  have  produced  instead,  cannot 
even  be  calculated  or  determined,  a  national 
profit  is  necessarily  incalculable  and  indetermin- 
ate, and  by  no  means  identical  with  a  nation's 
savings,  as  the  Physiocrats  and  Mercantilists 
seem  to  have  taken  for  granted. 

Their  second  error  consisted  in  their  regard- 
ing the  "  surplus  "  as  the  ultimate  object  of 
human  endeavour,  and  holding  the  prosperity 
of  nations  as  measurable  by  its  amount.  The 
present  conception  of  the  productive  process 
recognises,  indeed,  that  accumulation  is  a  means 
not  an  end,  but  it  agrees  with  the  Physiocrats 
and  Mercantilists  to  the  extent  of  believing, 
or  at  least  assuming,  that  it  is  a  means  for 
which  an  unsatisfied  and  unsatisfiable  demand 
always  exists  and  which  always  pays  for  its 
cost  and  something  more,  so  that  in  a  sense  a 
nation's  prosperity  is  still  measurable  by  what 
it  has  accumulated.  Our  conception  of  the 
process  diverges  yet  more  from  the  "  Pre- 
Adamite  "  one,  in  claiming  that  the  usefulness 
of  any  means  is  necessarily  limited  by  the  uses 
it  can  be  put  to,  and  that  as  the  only  use  of 
capital  is  to  supply  the  enterpriser  with  such 
time  relations  as  he  requires,  and  as  the  time 
relations  he  requires  are  limited  in  amount  to 
such  quantity  as  he  can  find  use  for  at  a  normal 
rate  of  profit,  the  national   savings   can,  and 


Capital  267 

periodically  do,  exceed  this  amount — so  that 
so  far  as  accumulations  can  be  looked  upon  as 
an  indication  of  a  nation's  industrial  success, 
it  is  only  the  amount  it  finds  itself  able  to  ac- 
cumulate without  depressing  profits  below  the 
normal  rate  that  can  so  serve. 


CHAPTER  IX 

LABOUR 

TH  E  third  subsidiary  factor,  which  we  are  now 
about  to  consider,  differs  from  the  other 
two  in  a  characteristic  common  to  it  and  to  en- 
terprise. It  is  an  active  and  self-initiated  force, 
while  opportunity  and  capital  are  inert  or  acted 
upon.  They  are  properly  spoken  of  as  used  or 
utilised,  while  labour  is  perhaps  more  fitly  re- 
garded as  directed.  This,  however,  while  dis- 
tinguishing it  from  the  two  wholly  inert  factors^ 
does  not  elevate  it  from  its  subsidiary  position, 
as  enterprise  employs  all  of  them  as  means. 
And  indeed  the  distinction  itself  is  not  ab- 
solute, as  slaves  and  domestic  animals,  certainly 
items  of  "  fixed  capital,"  are  also  active  self- 
initiated  forces,  which  the  enterpriser  directs 
through  their  intelligence  very  much  as  he  does 
a  hired  labourer,  although  he  appeals  to  a 
different  class  of  motives.  Nevertheless  the 
distinction  holds  in  a  sense,  for  while  the 
animal  and  the  slave  must  have  sufficient  in- 
268 


Labour  269 

telligence  to  understand  the  master's  directions 
— which  are  followed  from  fear  of  punishment 
and  the  hope  of  a  sustinence,  and  therefore 
from  self-interest — they  receive  no  definite  and 
pre-arranged  part  of  the  purchasing  power  they 
help  to  create.  The  motives  therefore  which 
induce,  indeed  compel,  their  activity  are  purely 
individualistic  and  not  economic.  To  the  extent 
that  liberty  of  choice  is  denied  they  are  inert 
and  acted  upon,  and  are  not  active  participants 
in  production  in  the  sense  of  their  participation 
being  voluntary. 

The  distinction  we  are  considering  is  anal- 
ogous to  that  between  services  and  commodities 
in  that  the  sacrifice  of  the  labourer  is  not  em- 
bodied in  anything  he  retains  the  control  of, 
whereas  the  sacrifice  involved  in  abstinence  is 
embodied,  as  it  were,  in  purchasing  power,  per- 
manent so  long  as  it  is  unexpended.  It  cannot 
be  said  perhaps  that  any  sacrifice  is  involved  in 
the  act  of  appropriating.  Nevertheless  as  ap- 
propriation is  justifiable  when  it  leads  to  an 
increase  of  production,  even  though  the  serv- 
ice performed  involves  no  sacrifice,  it  is  like- 
wise embodied  in  a  facility  of  production 
permanent  to  the  extent  that  the  employment 
of  the  facility  is  monopolised  or  restricted. 
The  reward  of  labour  is  therefore  direct  and 
immediate  whereas  the  reward  of  abstinence 


270    Enterprise  and  Production 

and  appropriation  is  indirect  and  postponed. 
Labour  obtains  an  immediate  income  but  ab- 
stinence and  appropriation  obtain  only  some- 
thing capable  of  yielding  income. 

There  is  this  to  be  said  in  justification,  or 
rather  in  explanation,  of  the  ridiculous  claim 
that  labour  produces  everything  and  should 
therefore  have  everything, — that  the  only  direct 
personal  sacrifices  involved  in  an  act  of  produc- 
tion are  those  of  the  labourer  and  the  enter- 
priser. So  long  as  capital  and  opportunity  are 
existent  and  in  possession,  there  is  no  personal 
sacrifice  involved  in  their  use.  Once  it  is  ad- 
mitted that  the  division  of  the  product  should 
be  governed  by  the  personal  sacrifices  immedi- 
ately involved  in  its  production,  we  are  forced 
to  exclude  the  abstainer  and  the  appropriator 
from  any  equitable  share  in  it.  Then,  if  we  re- 
gard the  entrepreneur  as  only  a  co-ordinator, 
he  is  only  a  special  kind  of  labourer,  and  the 
whole  product  rightly  belongs  to  labour.  The 
falsity  of  this  deduction  becomes  apparent 
enough  in  this  statement  of  it.  The  proper 
principle  of  division  is  not  personal  sacrifice, 
whether  immediate  or  mediate,  but  economic 
sacrifice,  i.  e.y  not  what  is  suffered  but  what  is 
foregone  and  the  entrepreneur  is  not  as  such  a 
co-ordinator. 

When  the  enterpriser  is  his  own  employer 


Labour  271 

in  producing  an  exchangeable  article,  the  two 
functions  of  labour  and  enterprise  are  indistin- 
guishably  mingled,  except  as  the  part  due  to 
him  as  labourer  can  be  computed  by  what  he 
foregoes,  that  is  by  what  he  could  have  earned 
if  he  had  hired  out  to  another.  His  wages  and 
profits,  however,  taken  together,  while  unprede- 
termined  are  pre-arranged,  that  is  they  must 
necessarily  equal  the  total  purchasing  power 
created  less  the  stipulated  rewards  of  other 
labour,  opportunity,  and  capital.  When  the 
product  is  unexchangeable,  that  is,  a  service 
rendered  oneself,  or  material  good  consumed 
by  its  creator,  it  is  a  matter  for  the  science  of 
individualistic  activities,  and  does  not  directly 
concern  us,  except  to  notice  that  the  case  is  one 
in  which  two  separate  functions  are  exercised 
by  the  same  individual.  By  the  productive 
force  "  labour  "  we  mean  in  Economics  the  in- 
telligent efforts  of  free  agents,  exerted  at  the 
behest  and  under  the  direction  of  an  employer, 
for  a  reward  either  stipulated  in  amount,  or 
computed  by  a  possible  reward  of  wages  fore- 
gone in  the  case  of  one  employing  himself. 

Labour  is  always  co-ordinating — the  initial 
force  that  brings  material  things  purposely  into 
new  space  relations, and  ideas  into  juxtaposition, 
or  new  place  relations.  This  is  as  true  of  the 
navvy,  who  chooses  where  his  pick  shall  strike. 


2  72    Enterprise  and  Production 

as  of  Mr.  Morgan  when  promoting  the  Steel 
Trust ;  the  only  difference  being  in  the  degree 
of  each  of  the  two  kinds  of  co-ordination  in- 
volved— the  physical  and  the  psychical.  The 
intellectual  effort  of  the  navvy  is  indeed  very 
small  as  compared  with  his  physical  exertion, 
and  the  manual  labour  of  Mr.  Morgan  even 
smaller  as  compared  with  his  intellectual  effort, 
but  both  physical  and  mental  effort  are  involved 
in  every  act  of  labour. 

Here  we  see  another  reason  why  the  defi 
nition  of  the  entrepreneur  as  a  co-ordinator 
fails.  Even  if  we  are  willing  to  consider  him  as 
an  intellectual  labourer,  and  profits  as  a  kind  of 
wages,  which  is  absurd,  the  distinction  is  one 
founded  upon  degree  only,  which  is  wholly  in- 
admissible in  any  valid  system  of  scientific  classi- 
fication. As  Economics  is  indubitably  a  study 
of  the  functions  exercised  by  individuals  work- 
ing in  combination  for  personal  ends,  the  differ- 
ence between  the  co-ordinating  labourer  and  the 
entrepreneur  must  be  in  the  nature  of  their  func- 
tions. But  (and  here  we  think  is  to  be  found 
the  occasion  of  some  confusion  of  thought)  we 
do  not  mean,  in  the  scientific  use  of  the  two 
terms,  any  given  individuals,  as  it  is  impossible 
for  the  individual  to  confine  himself  to  the  ex- 
ercise of  any  one  of  the  four  industrial  functions. 
When  we  speak  of  a  man  as  a  labourer,  we  do 


Labour  273 

not  mean  that  he  is  nothing  else,  but  that  labour 
is  the  predominant  function  performed  by  him, 
and  that  his  industrial  activity  will  be  mainly 
governed  by  the  inducements  arising  from 
wages.  Any  arrangement  of  individuals  into 
classes,  according  to  their  predominant  func- 
tions, must  necessarily  be  more  or  less  indefinite. 
In  individualistic  activities  the  result  of  every 
action,  and  indeed  of  every  thought,  is  the  joint 
product  of  at  least  three  functions, — an  oppor- 
tunity is  seized,  an  effort  is  made,  and  a  responsi- 
bility is  assumed,  and  the  remaining  factor  is 
brought  into  play  when  any  material  thing  is 
retained.  One  of  the  main  objections  to  the 
Risk  Theory  of  Profit  has  been  that,  as  the  en- 
trepreneur must  be  the  possessor  of  capital  to 
obtain  credit,  it  is  as  a  capitalist,  and  not  as  an 
enterpriser,  that  he  subjects  himself  to  risk, 
merely  putting  his  own  capital  in  the  position 
of  greatest  hazard.  This  is  of  course  true,  in 
the  main,  of  the  individual  enterpriser,  although 
cases  can  be  cited  in  which  credit  is  based  en- 
tirely upon  the  character  of  the  borrower.  But 
we  are  now  enabled  to  appreciate  that,  if  it  were 
entirely  true,  the  criticism  is  wholly  wide  of  the 
mark.  At  the  best  it  is  only  an  instance  where 
one  function  cannot  be  exercised  at  all,  except 
in  conjunction  with  another,  which  circumstance 
by  no  means  proves  that  the  two  functions  are 
18 


2  74    Enterprise  and  Production 

identical  or  even  similar.  The  real  questions 
are,  whether  the  loaning  of  capital  on  unques- 
tioned security  is  the  same  kind  of  an  action 
as  assuming  the  risk  and  responsibility  of  the 
employment  of  that  capital  in  industry,  and 
whether  the  inducements,  that  is  the  results  ex- 
pected from  the  two  actions,  are  governed  by 
the  same  general  laws  and  influences.  Some 
confusion  of  thought  in  economic  discussion  is 
certainly  traceable  to  the  habit  of  speaking  of 
landlords,  capitalists,  labourers,  and  entrepre- 
neurs as  distinct  classes  of  individuals ;  whereas 
what  we  should  distinguish  between  is  the  kinds 
of  actions  individuals  perform.  When  we  divide 
men  into  thinkers  and  doers,  we  do  not  mean 
to  imply  that  because  a  man  thinks  he  cannot 
do,  or  that  because  he  does  he  cannot  think. 
Every  man  is  necessarily  both  thinker  and  doer. 
The  difference  between  individuals  as  thinkers 
and  doers  is  one  of  degree  only,  but  the  dif- 
ference between  thinking  and  doing  is  radical, 
though  not  more  so  than  that  between  assuming 
the  responsibility  of  an  enterprise  and  co-ordin- 
ating the  means  required  to  subject  oneself  to 
responsibility. 

Now  what  is  the  relation  of  the  labourer  to  the 
enterpriser?  What  need  of  the  latter  does  the 
former  fill?  When  the  enterpriser  has  secured 
his  opportunity  and  engaged  his  capital,  he  finds 


Labour  275 

himself  helpless  unless  he  can  bring  them  into 
relation,  or  co-ordinate  them.  The  form  or  place 
of  the  capital,  or  rather  of  the  things  in  which 
capital  is  invested,  must  be  changed  to  make 
the  opportunity  available.  How  this  is  done  is 
a  matter  of  indifference  to  him.  Whether  it  is 
accomplished  directly  through  labour,  or  indi- 
rectly by  labour,  through  the  use  of  machinery, 
is  wholly  a  matter  of  cost.  What  the  enterpriser 
wants  and  what  he  will  pay  for  is  accomplished 
co-ordination  in  space  or  place.  The  amount  of 
effort  expended,  or  pain  endured,  by  those  he 
hires,  he  cares  nothing  about.  He  will  pay  no 
more  for  the  labour  of  a  cripple  because  the  pain- 
cost  to  the  cripple  is  so  great,  or,  if  he  does,  it  is 
on  the  ground  of  charity,  and  not  from  eco- 
nomic motives.  It  is  the  kind  and  amount  of 
co-ordination  effected  that  governs  what  he  can 
afford  to  pay. 

We  have  here  another  example  of  the  claim 
heretofore  advanced  for  enterprise,  as  the  best 
standpoint  from  which  economic  phenomena 
can  be  observed,  and  the  best  basis  for  their 
scientific  arrangement.  The  moment  we  seek 
the  definition  of  labour  in  its  relation  to  enter- 
prise, we  at  once  see  that  what  the  employer 
wants,  buys,  and  pays  for  is  results,  and  that 
therefore  its  distinguishing  characteristic  is 
not  effort  or  pain,  but  co-ordination  in  place  or 


276    Enterprise  and  Production 

space.  All  things  material  and  immaterial  are 
in  flux,  that  is  are  undergoing  change  of  time, 
form,  or  place.  To  divert  the  course  of  change 
in  form  or  space  requires  of  course  the  interfer- 
ence of  fresh  force,  and  the  fresh  force  to  be 
purposeful  must  arise  from  an  act  of  volition. 
This  is  exactly  what  the  common  labourer  does, 
and  what  he  has  to  offer  for  sale  is  the  change 
he  can  bring  about  in  the  direction  of  the  forces 
of  nature,  the  co-ordination  he  is  able  to  effect 
in  the  form  and  place  of  material  things.  The 
distinctive  function  of  physical  labour  can  there- 
fore be  nothing  else  but  co-ordination  in  space, 
and  of  psychical  labour  co-ordination  of  ideas, 
facts  that  seem  to  have  escaped  those  who 
insist  upon  defining  the  entrepreneur  as  the  co- 
ordinator. The  individual  entrepreneur,  is  in- 
deed always  a  co-ordinator,  but  that  is  because 
he  is  a  labourer  as  well  as  an  enterpriser,  because 
he  can  and  indeed  must  co-ordinate  for  himself 
as  well  as  be  co-ordinated  for  by  others.  He  can- 
not of  course  assume  the  ownership  of  the  pro- 
duct without  directing,  either  himself,  or  through 
an  agent,  the  co-ordination  from  which  the  pro- 
duct results.  He  cannot  assume  the  responsi- 
bility of  an  undertaking  in  which  he  himself  has 
done  nothing  at  all.  The  purpose  is  ownership 
— co-ordination  is  merely  the  means. 

Undoubtedly,  those  who   have  defined   the 


Labour  277 

entrepreneur  as  the  co-ordinator  have  not  in- 
tended the  term  in  the  wide  signification  here 
given  it,  but  it  can,  I  think,  easily  be  made  evi- 
dent that  their  narrower  use  is  illegitimate. 
They  would  perhaps  exclude  the  physical  act 
of  placing  things  in  relation,  confining  their 
meaning  of  co-ordination  to  management,  that  is 
to  the  volition  or  psychical  effort  from  which 
the  physical  act  results.  Of  course  every 
volition  involves  an  assumption  of  responsibil- 
ity. Whoever  the  executant,  the  individual  is 
responsible  for  what  he  wills  and  directs.  Pur- 
pose and  responsibility  are  inseparable.  When 
the  labourer  performs  an  act  of  co-ordination  he 
acts  with  a  purpose,  and  if  his  purpose  is  misdi- 
rected or  inadequately  accomplished,  he  cannot 
transfer  all  the  consequences  to  his  employer. 
He  at  least  risks  his  job.  There  always  remains 
a  trace  of  enterprise  in  labouring,  though  the 
enterprise  involved  is  individualistic,  not 
economic.  There  remains  likewise  a  trace  of 
co-ordination  in  every  act  of  enterprise.  The 
individual  enterpriser  has  at  least  to  choose  the 
stock  he  will  purchase,  or  the  agent  who  will 
select  the  responsibilities  he  is  to  assume,  both 
acts  of  co-ordination.  Now  this  agent,  in 
choosing  risks  for  his  employer,  also  runs  a  risk 
for  himself  of  exactly  the  same  character  as  the 
labourer's ;  namely  that  of  losing  his  situation 


278    Enterprise  and  Production 

from  errors  of  judgment,  but  this  again  is  an 
individualistic  risk.  The  choice  of  the  economic 
risks  which  he  assumes  for  his  employer  is  ex- 
actly the  same  kind  of  co-ordination  as  his 
employer's  choice  of  him.  Both  are  acts  of  in- 
tellectual, as  distinguished  from  physical,  co-or- 
dination. The  agent  is  paid  by  salary — a  form  of 
wages, — the  employer  by  both  wages  and  profits, 
because  while  both  co-ordinated,  the  latter  alone 
subjected  himself  to  the  results  of  the  co-ordin- 
ation. The  difference  between  the  action  of 
the  employer  and  that  of  the  agent  is  funda- 
mental, and  cannot  therefore  be  found  in  what 
is  common  to  them  both,  namely  the  choice  of 
the  direction  co-ordination  shall  take,  which  is 
the  mental  part  of  an  act  of  co-ordination  as 
distinguished  from  the  physical.  To  assume 
the  consequences  of  co-ordination  differs  funda- 
mentally from  co-ordination  itself,  even  when 
some  partial  act  of  co-ordination  is  a  prelim- 
inary to  subjecting  oneself  to  the  entire  con- 
sequences of  the  whole  co-ordination.  The 
entrepreneur,  or  enterpriser,  is  therefore,  not  the 
co-ordinator,  but  the  one  for  whom  co-ordina- 
tion is  effected. 

If  it  is  still  insisted  that  the  entrepreneur  can 
be  properly  defined  as  the  co-ordinator,  because 
**  the  acts  of  the  agent  must  be  considered  as 
the  acts  of  the  principal,"  it  would  indeed  fol- 


Labour  279 

low  that  enterprise,  or  the  assumption  of  re- 
sponsibility, and  co-ordination,  restricted  to  the 
intellectual  part  of  the  process  of  bringing 
things  into  relation,  would  always  be  coinci- 
dent, but  that  is  hardly  saying  that  they  are 
the  same  thing.  We  can  certainly  distinguish 
between  the  act  of  assumption  and  the  choice, 
directly  or  through  an  agent,  of  what  is  to  be 
assumed,  though  whether  we  can  make  the 
distinction  is  not  a  matter  of  much  theoretical 
importance  to  our  argument.  If  we  are  denied 
the  privilege,  it  is  only  because  intellectual 
co-ordination  and  enterprise  are  identical  things, 
two  aspects  of  the  same  action,  the  one  from 
before  and  the  other  from  behind.  But  surely 
it  is  inadmissible  to  regard  the  acts  of  an 
agent  as  the  acts  of  his  principal,  in  the  sense 
the  argument  requires.  What  is  meant  by  the 
phrase,  in  common  speech,  is  only  that  the  prin- 
cipal assumes  the  responsibility  for  what  is  done 
by  his  agents,  not  that  he  must  be  regarded  as 
the  actual  performer  of  what  they  do  for  him 
under  his  direction.  The  contrary  is  to  deny 
the  existence  of  any  such  thing  as  labour  either 
physical  or  intellectual.  Why  should  the  intel- 
lectual efforts  of  subordinates  be  attributed  to 
principals,  any  more  than  their  physical  efforts? 
No  reason  can  be  given,  but  if  the  physical 
efforts  of  agents  are  also  to  be  attributed  to 


28o    Enterprise  and  Production 

principals,  the  entrepreneur  is  the  only  phy- 
sical labourer  and  we  must  eliminate  physical 
labour  also  from  the  productive  forces,  and  re- 
gard all  wages  and  salaries  as  only  a  form  of 
profit.  Any  way  the  matter  is  looked  at, 
we  are  finally  forced  to  the  conclusion  that  co- 
ordination, whether  physical  or  mental,  is  the 
pecuHar  and  distinguishing  function  of  labour. 
Which  granted,  it  is  of  course  self-evident  that 
it  is  only  incidentally,  and  as  an  individual,  that 
the  entrepreneur  is  a  co-ordinator,  and  that, 
as  an  individual,  he  is  only  necessarily  a  co- 
ordinator in  that  he  is  forced  to  perform  at 
least  one  act  of  mental  labour,  as  a  prerequisite 
to  assuming  the  ownership  of  the  product. 

I  do  not  remember  that  any  one  has  verbally 
defined  the  term  "labourer,"  in  its  economic 
sense,  as  "  co-ordinator,"  but  I  think  that  a 
careful  consideration  of  what  has  been  written 
about  labour  will  show  that  the  idea,  though 
never  expressed  or  formulated,  really  underlies 
all  discussions  of  the  subject.  It  is  often  ex- 
plicitly stated,  and  it  has  never  been  contro- 
verted, that  what  physical  labour  effects  is 
merely  to  change  the  form  and  place  of  matter. 
I  do  not  remember  the  complementary  state- 
ment being  made  that  mental  labour  consists 
in  associating  ideas.  Still,  as  the  fact  that 
there  is  such  a  thing  as  mental  labour  is  fully 


Labour  281 

acknowledged,  the  necessary  implication  is  that 
it  consists  in  the  re-arrangement  of  ideas.  It 
seems  to  have  been  overlooked  however  that 
this  is  just  what  co-ordination  consists  in.  The 
meaning  of  co-ordination  is  to  bring  things 
into  new  relations  for  a  purpose — to  re-arrange 
them  with  a  definite  end  in  view.  Surely  this 
is  only  another  form  of  words  for  what  every- 
body recognises  to  be  effected  by  labour. 

The  probable  explanation  of  how  such  a 
truism  as  this  came  to  be  overlooked  happens 
to  be  a  very  good  illustration  of  how  the  pre- 
valent conception  of  the  productive  process 
leads  to  mystification.  The  attempt  to  arrive 
at  a  concept  of  labour  by  induction  led  almost 
necessarily  to  its  definition  in  terms  of  effort, 
as  the  effort  involved  is  certainly  the  most 
striking  characteristic  discoverable  by  observa- 
tion. Consequently  we  find  in  all  economic 
disquisitions  constant  reference  to  the  pain-cost 
of  labour,  carrying  the  implication  that  it  is  its 
economic  cost.  Elsewhere  I  have  shown  that 
the  economic  cost  of  anything  is  the  economic 
quantity  foregone  to  obtain  it,  and  not  any 
personal  sacrifice  of  feelings  involved,  the  latter 
of  course  being  a  purely  individualistic  matter. 
Observation  also  has  failed  to  detect  which  of 
the  many  peculiarities  of  labour  is  the  funda- 
mental one.     And  it  cannot  be  blamed  for  this 


282    Enterprise  and  Production 

as  the  advance  from  the  particular  to  the  gen- 
eral is  necessarily  empirical,  which  is  to  say 
that  the  inductive  method  seeks  fundamental 
distinctions  only  as  the  culmination  of  its  pro- 
cess. It  selects  such  peculiarities  as  are  most 
striking,  and  tries  them  on,  one  after  another, 
until  it  finds  one  that  appears  to  fit,  and  is 
usually  satisfied  when  the  garment  needs  only 
a  little  alteration  and  even  then  does  not  fit 
very  snugly.  Observation  did  indeed  disclose 
that  labour  had  a  function  to  perform,  but  not 
that  this  function  was  its  fundamental  class- 
mark.  Consequently  it  looked  upon  this  func- 
tion as  a  mere  attribute  of  labour,  to  which  it 
need  give  no  very  exhaustive  study,  and  as  the 
productive  factors  were  more  obtrusive  facts 
than  the  productive  functions  it  naturally  re- 
garded them  as  fundamental  and,  so  far  as  it 
defined  functions  at  all,  did  so  in  terms  of  the 
factors.  Consequently  it  failed  to  detect  the 
fact  that  co-ordination  was  the  fundamental 
peculiarity  of  labour,  and  when  it  thought  the 
term  applicable  also  to  the  function  of  the  en- 
trepreneur, because  as  an  individual  he  did 
co-ordinate,  it  so  applied  it  without  scruple — 
which  it  could  do  without  detection  the  more 
easily  because  it  had  never  made  much  theo- 
retic use  of  the  function  performed  by  labour. 
Nevertheless  what  use  it  did  make  of  it  tacitly 


Labour  283 

assumed  that  it  was  co-ordination,  though  it 
has  never  perhaps  been  called  by  that  name. 
The  verbal  recognition  of  the  idea  does,  I 
think,  enhance  considerably  the  clearness  of  our 
conceptions.  At  least  it  makes  it  evident  that 
co-ordination  is  not  the  distinguishing  function 
of  the  entrepreneur. 

It  will  also,  I  think,  aid  us  in  other  directions. 
For  instance,  a  good  deal  has  been  written 
about  the  pain-cost  of  labour  to  the  labourer, 
most  of  which  is  true  enough,  but  has  nothing 
to  do  with  Economics.  These  pain-costs  are 
purely  individualistic  matters,  and  have  no 
direct  relation  at  all  to  what  labourers  obtain 
for  their  efforts.  Of  course  men  will  engage  in 
pleasant  occupations  for  lower  wages  than  dis- 
agreeable ones  command,  and  will  decline  to 
work  beyond  the  point  where  the  enjoyment 
to  be  derived  from  the  additional  wages  is 
overbalanced  by  the  increased  pain-cost  of  ex- 
tra hours.  But  the  balancing  of  such  consider- 
ations, the  act  of  valuing  involved,  is  purely 
individualistic.  It  determines  indeed  the  kind 
and  amount  of  co-ordinating  the  labourer  is 
wiUing  to  sell,  but  not  what  share  of  the  pro- 
duct he  can  obtain  for  a  given  effect  produced. 
Economics,  as  a  science,  is  directly  interested  in 
what  this  latter  amount  shall  be,  as  compared 
with  the  other  shares  of  the  product,  and  only 


284    Enterprise  and  Production 

indirectly  in  the  individualistic  circumstances 
affecting  its  pain-cost,  just  as  it  is  only  indi- 
rectly interested  in  the  tendencies  affecting 
savings,  or  the  appropriation  of  opportunities, 
or  the  spirit  of  enterprise.  The  influences 
which  make  men  powerful,  skilful,  energetic, 
lead  them  to  be  frugal,  enable  them  to  detect 
unappropriated  opportunities,  or  to  become 
more  venturesome,  are  individualistic  and  be- 
long to  the  study  of  character,  and  are  useful 
to  Economics  only  as  data.  The  only  cost 
which  Economics  has  to  consider  is  exchange 
cost,  that  is  the  purchasing  power  sacrificed  to 
acquire  the  purchasing  power  actually  obtained, 
whether  it  appears  in  the  form  of  wages,  inter- 
est, rent,  or  profit.  The  economic  cost  of  any- 
thing is  simply  the  purchasing  power  sacrificed, 
or  foregone,  to  obtain  it. 

What  Economics,  as  a  science,  is  concerned 
about  is  how  variations  in  the  available  amounts 
of  labour,  capital,  and  opportunities,  and  the 
spirit  of  enterprise  will  affect  combined  produc- 
tion under  the  stimulus  of  personal  incentive. 
The  tendencies  which  cause  these  amounts  to 
vary  are  to  be  found  in  the  circumstances  which 
govern  social  evolution  and  the  development  of 
human  character  and  belong  primarily  to  Soci- 
ology and  Individualistic  Science,  and,  strictly 
speaking,  are  extrinsic  to  Economics,  though 


Labour  285 

none  the  less  important  as  data  on  that  account. 
An  important  peculiarity  of  labour  which  has 
been  generally  overlooked,  or  at  least  is  very 
rarely  dilated  upon,  is  that  it  is  the  least  elastic 
of  the  four  productive  factors.  The  opportuni- 
ties furnished  by  land  cannot  indeed  be  very 
rapidly  enlarged  by  bringing  fresh  land  under 
culture,  but  the  requisite  elasticity  can  be  ob- 
tained within  a  single  year  by  a  more  intensive 
culture,  and  the  eagerness  with  which  other 
kinds  of  opportunity  are  sought  quickly  re- 
sponds to  the  stimulus  of  unemployed  capital. 
Capital,  as  we  have  seen,  is,  at  least  in  pro- 
gressive communities,  always  pressing  upon  its 
limitations,  or  is  being  so  rapidly  accumulated 
that  such  pressure  will  soon  commence,  and  is 
thus  quickly  adapted  to  any  enlargement  of 
the  field  for  investment.  But  it  not  only  takes 
about  eighteen  years  to  bring  up  a  labourer, 
but  labourers  are  not  raised  for  gain.  The 
motives  tending  to  increase  the  labour  force 
are  not  only  non-economic,  but  of  an  entirely 
different  nature  from  those  leading  to  the 
appropriation  of  opportunities,  and  additions 
to  capital.  In  the  latter  actions  a  present  pen- 
alty is  incurred  for  the  sake  of  an  expected 
benefit  in  the  future,  whereas  the  motive  to 
procreation  is  an  immediate  gratification,  the 
price  of  which  is  to  be  paid  in  the  future.    The 


286    Enterprise  and  Production 

creation  of  labour  force  is  affected  therefore  by 
tendencies  the  very  reverse,  in  this  important 
respect,  of  those  leading  to  the  creation  of 
capital  and  opportunity.  Marriages  to  be  sure 
are  more  frequent  in  prosperous  years,  and  thus 
an  active  demand  for  labour  tends  to  increase 
the  supply  eventually,  but  not  only  is  this  sup- 
ply furnished  long  after  the  demand,  but  it 
is  also  only  an  indirect  result.  Children  are 
brought  into  the  world  for  the  private  satisfac- 
tion of  their  parents,  and  not  because  some 
enterpriser  twenty  years  after  will  need  them 
as  labourers.  The  transformation  of  unskilled 
into  skilled  labourers,  though  its  motive  is  simi- 
lar to  those  leading  to  appropriation  and  ac- 
cumulation, is  also  a  tedious  process,  so  that 
the  efficiency  of  an  existing  labour  force  is 
comparatively  inelastic.  Nevertheless  as  the 
enterpriser's  demand  for  co-ordination  is,  as  we 
have  seen,  quite  variable,  while  the  available 
labour  force  is  so  unvariable,  both  in  quantity 
and  in  quality,  they  must  be  adjusted,  and  the 
necessary  adjustment  between  them  is  brought 
about  by  the  employment  of  only  such  of  the 
existing  labourers  as  the  prevailing  cost  of 
reproduction  justifies. 

As  the  quantity  of  available  labour  cannot 
be  adjusted  to  the  temporary  variations  in  the 
demand  for  labour,  the   necessary   equilibrium 


Labour  287 

must  be  obtained  by  an  adjustment  of  the 
number  of  labourers  employed.  Consequently 
when  business  commences  to  improve  and 
more  labour  is  required,  enterprisers  are  forced 
to  advance  money  wages  to  obtain  it.  This 
means  that  previous  to  the  advance  in  money 
wages  there  has  been  a  decline  in  **  propor- 
tional wages  " — that  is  profits  are  obtain- 
ing a  larger  and  wages  a  smaller  proportion  of 
the  product  than  is  usual — which  the  advance 
in  money  wages  is  supposed  to  adjust,  and 
which  would  adjust  it  if  the  general  market  for 
commodities  remained  unchanged.  Whether 
it  will  remain  unchanged  depends,  however, 
upon  an  entirely  distinct  matter,  namely, 
whether  the  scarcity  of  commodities  which 
initiated  the  rise  in  prices  preceding  the  ad- 
vance in  money  wages  continues  unabated — 
which  circumstance  depends  in  its  turn  upon 
the  proportion  of  the  general  income  which 
is  saved  and  added  to  capital.  If  the  amount 
of  commodities  demanded  is  the  same,  prices 
must  tend  to  bear  the  same  ratio  to  the  cost  of 
reproduction,  whatever  that  cost  is  in  money, 
and  any  temporary  change  in  the  ratio  is  almost 
immediately  rectified  by  a  change  in  the  price 
of  commodities.  If  there  are  no  savings  there 
can  be  no  addition  to  the  stock  of  saleable 
goods,  and  therefore  the  extra  money  wages 


288    Enterprise  and  Production 

paid  affords  an  additional  money  demand,  un- 
til prices  in  the  general  market  have  advanced 
to  a  point  where  the  new  scale  of  money  wages 
will  have  only  the  same  purchasing  power  as  the 
lower  money  wages  obtained  before  the  advance. 
That  is,  reckoned  in  purchasing  power,  what 
labourers  have  momentarily  gained  by  an  ad- 
vance in  money  wages  is  almost  immediately 
taken  away  from  them,  and  their  **  proportional 
and  commodity  wages"  are  just  what  they 
were  before — and  so  on  ad  infinitum^  so  long  as 
the  amount  of  capital  enterprisers  are  forced  to 
employ  is  not  enlarged. 

Labour  is  often  erroneously  called  a  com- 
modit)^  but  if  the  term  be  allowed  it  differs 
from  all  other  commodities  in  this  circumstance: 
the  supply,  when  limited  and  unchangeable, 
does  not  gain  in  the  purchasing  power  of  each 
unit  when  the  demand  is  increased,  because, 
unlike  any  given  commodity,  an  advance  in  its 
money  price  is  always  accompanied  by  a  cor- 
responding loss  in  the  purchasing  power  of 
money,  or,  in  other  words,  by  a  correspond- 
ing advance  in  general  prices,  other  circum- 
stances of  course — that  is  the  gross  amount 
of  circulating  capital — remaining  the  same.  On 
the  other  hand  if  all  labourers  were  always  will- 
ing to  work  at  any  wages  offered  them,  they 
would  lose  nothing  by  so  doing  if  the  accumu- 


Labour  289 

lation  of  capital  were  not  affected,  as  the  prices 
of  what  labourers  consumed  would  decline  cor- 
respondingly. Such  action  of  the  labourers 
would  tend  of  course  to  a  temporary  rise  in  the 
rate  of  profit,  which  would  so  stimulate  the 
competition  of  enterprisers  for  labourers  as  to 
shortly  raise  wages  to  their  previous  level. 
Under  all  conceivable  circumstances,  therefore, 
the  proportion  of  the  product  that  accrues  to 
labour  is  self-adjusting,  and  can  only  be  tem- 
porarily affected  by  the  labourers  exacting 
higher  or  accepting  lower  money  wages. 

It  follows,  as  a  corollary  of  the  views  just 
advanced,  that  it  is  a  matter  of  supreme  im- 
portance to  every  community  and  nationality 
that  the  field  for  the  profitable  investment  of 
its  capital  should  be  enlarged  as  much  as 
possible,  and  by  every  legitimate  means,  as  it 
is  in  such  enlargement  that  the  real  cause 
of  the  growth  of  the  national  wealth  is  to  be 
found.  Every  additional  opportunity  for  pro- 
fitable enterprise,  by  absorbing  the  capital 
that  would  otherwise  fail  to  find  profitable  use, 
postpones  the  evil  day  when  enterprisers  will 
be  forced  in  self-defence  to  limit  their  opera- 
tions, and  curtail  the  employment  of  labour. 
As  a  matter  of  fact  that  time  always  comes 
eventually,  no  matter  how  much  the  field  for 
investment  is  widened,  for  the  more  prosperous 

19 


290    Enterprise  and  Production 

the  times,  the  more  rapidly  is  capital  accu- 
mulated, owing  to  the  fact,  already  pointed  out, 
that  marginal  savings  are  always  made  out  of 
incomes  greater  than  the  average  yearly  expec- 
tation. And  it  is  also  to  be  noticed  that,  as 
enterprise  is  strictly  limited  by  the  available 
labour  force  and  the  state  of  the  arts,  the  greater 
the  capital  that  can  be  profitably  employed, 
the  greater  the  capital  per  capita  the  nation 
will  have,  except  of  course  to  the  extent  that 
foreign  capital  invades  its  field  for  investment. 
And  as  it  results  from  a  nation's  possessing  a 
large  amount  of  capital  per  capita  that  a  greater 
number  of  its  inhabitants  are  in  a  position  to 
save,  the  competition  between  savers  will  be 
keener,  so  that  the  marginal  saver  in  a  prosper- 
ous nation  will  be  satisfied  with  a  lower  rate  of 
return  in  pure  interest,  and  this  again  increases 
the  demand  for  labour  and  widens  the  field  for 
the  profitable  investment  of  the  national  capital 
both  at  home  and  abroad. 

In  backward  and  semi-civilised  communities, 
and  in  those  whose  political  conditions  fail  to 
afford  sufficient  security  for  enterprise  and  cap- 
ital, and  also  in  purely  agricultural  countries, 
the  same  disparity  in  the  elasticity  of  the  three 
subsidiary  productive  factors  does  not  obtain. 
Great  variations  in  the  pressure  of  capital  upon 
its  limitations  and  in  the  availability  of  oppor- 


Labour  291 

tunities  do  not  occur,  and  consequently  they 
rarely,  if  ever,  suffer  from  panic  due  to  purely 
industrial  causes,  or  from  periods  of  great  in- 
dustrial stagnation,  not  traceable  to  social  or 
political  conditions  or  to  crop  failure,  except  of 
course  to  the  extent  in  which  the  demand  for 
their  exports  falls  off,  on  account  of  panic  or 
stagnation  having  reduced  the  buying  power 
of  the  accumulating  nations.  Stagnation  is 
more  constant  and  not  so  periodical.  Their 
condition  is  rather  that  of  perpetual  industrial 
inactivity,  so  that  the  periods  of  activity  en- 
joyed by  the  industrial  nations  must  be  looked 
upon  as  a  gain,  rather  than  to  regard  the  more 
inactive  periods  as  entailing  a  loss. 

The  important  point  is  that  any  nation  which 
has  reached  the  stage  where  capital  exerts  a 
variable  pressure  upon  its  limitations  will  very 
shortly  have  all  the  capital,  either  native  or 
foreign,  that  can  be  profitably  employed,  and 
at  times  more ;  and  that  the  more  avenues  of 
profitable  investment  it  opens  up,  the  more 
rapidly  will  its  wealth  increase.  The  permanent 
additions  to  the  national  capital,  thus  rendered 
possible,  are  acquired,  not  at  the  expense  of 
consumption,  as  consumption  will  be  greater 
during  a  period  of  continued  activity  and  ac- 
cumulation than  it  would  have  been  during  the 
same  period  if  it  had  been  one  of  stagnation. 


292    Enterprise  and  Production 

but  are  the  combined  result  of  labour  force 
that  would  otherwise  have  been  wasted  in  idle- 
ness, of  opportunities  that  would  have  been 
overlooked,  and  of  enterprise  that  would  have 
been  misdirected  or  unthought  of. 

This  inelasticity  of  labour  force  as  compared 
with  the  other  productive  factors  affords  ex- 
planation for  a  good  many  other  apparent 
anomalies.  In  it,  I  think,  is  to  be  found  the 
real  value  of  colonies  to  a  nation.  We  fre- 
quently come  across  attempts  by  statisticians, 
who  are  neither  economists  nor  statesmen,  to 
calculate  the  value  of  colonies  by  computations 
of  the  profits  obtained  from  the  exports  to, 
and  the  imports  from,  them.  These  gains  are 
of  course  a  benefit  to  the  colonising  nation,  but 
when  they  are  less  than  the  cost  of  colonial 
administration,  it  by  no  means  follows  that  the 
colonies  should  be  cast  off  as  unprofitable  ap- 
pendages. The  main  gain  from  colonial  pos- 
sessions is  the  enlargement  they  afford  to 
the  field  for  investment — their  enhancement  of 
the  spirit  of  enterprise,  which  enables  a  people 
to  continue  accumulating  after  the  domestic 
demand  for  capital  is  supplied.  Colonising 
nations  also  naturally  develop  their  commerce 
and  manufactures,  both  of  which  occupations 
afford  a  wider  field  for  investment  than  agri- 
culture.    The  mere  trader,  whose   capital   is 


Labour  293 

locked  up  in  the  stock  of  goods  he  is  carrying, 
employs  more  capital  per  capita  of  employees 
than  any  other  enterpriser.  The  nation,  there- 
fore, that  is  able  to  carry  in  stock,  not  only  the 
goods  required  by  its  consumers,  but  also  the 
goods  required  by  foreign  consumers,  widens 
thereby  its  field  for  investment,  and  must  in- 
crease its  accumulated  wealth,  while  at  the 
same  time  consuming  more  than  it  would  have 
been  able  to  produce  and  consume  if  its  field 
for  investment  had  not  been  widened.  The 
important  fact  is  that  such  additions  to  capital 
are  almost  wholly  the  result  of  enabling  the 
enterpriser  to  employ  labour  that  would  other- 
wise have  been  wasted  in  idleness. 

Again,  we  see  why  the  ravages  of  war,  al- 
though necessarily  much  smaller  in  amount, 
are  so  fatal  to  backward  nations  in  which  there 
is  but  little  variable  pressure  of  capital  upon 
its  limits,  and  so  rapidly  repaired  in  accumu- 
lating nations.  When  Germany  exacted  that 
enormous  indemnity  from  France,  France  al- 
most immediately  entered  upon  a  long  sus- 
tained period  of  industrial  activity,  and  eager 
employment  of  labour ;  while  Germany  very 
shortly  afterward  suffered  from  industrial  de- 
pression and  lack  of  employment ;  so  that 
to-day  France  is  probably  about  as  rich  and 
Germany  very  little,  if  any,  better  off  than  if 


294    Enterprise  and  Production 

the  indemnity  had  not  been  exacted.  Despite 
the  enormous  destruction  of  wealth,  and  the 
yet  more  serious  loss  of  labour  force,  the 
United  States  is  probably  richer,  rather  than 
poorer,  from  the  civil  war.  The  practical  in- 
dustrial result  of  that  terrible  catastrophe  has 
been  to  widen  our  field  for  investment  and  re- 
move restrictions  upon  enterprise  utilising  our 
labour  force,  and  thus  to  make  our  accumula- 
tions, and  our  annual  product  per  capita, 
greater  than  would  have  been  the  case  if  the 
old  conditions  had  continued  to  this  day. 

As  labour  force  is  not  only  the  least  elastic 
and  most  strictly  limited  of  the  productive 
factors,  but  also  the  one  factor  whose  increase 
or  decrease  in  available  amount  is  not  directly 
affected  by  economic  considerations,  it  neces- 
sarily follows  that  a  nation's  prosperity  depends 
mainly  upon  its  existing  labour  force  being 
so  expended  as  to  yield  the  greatest  possible 
product.  The  periodic  waste  of  labour  force 
through  the  enforced  idleness  of  labourers  dur- 
ing times  of  industrial  depression  indicates 
that  the  economic  system  of  production  is  not 
wholly  successful  in  accompHshing  this.  Ow- 
ing to  the  now  somewhat  impaired  dogma  of 
laissez-faire,  which  however  still  exerts  a  very 
great,  though  often  unconscious,  influence,  it  is 
generally   taken    for   granted    that  the  entre- 


Labour  295 

preneur  in  best  utilising  labour  and  capital  for 
his  own  advantage,  will  necessarily  employ 
them  to  the  best  advantage  of  the  community 
of  which  he  is  a  member.  The  recognition  of 
enterprise  as  standing  apart  from,  and  dom- 
inant over,  the  other  productive  factors  should 
lead  us  to  recognise  that  this  assumption,  if 
riot  wholly  unfounded,  is  at  the  best  true  in  a 
very  partial  and  limited  sense.  The  fallacy  of 
laissez-faire  will  surely  be  evident  to  any  one 
appreciating  that  the  guiding  principle  of  eco- 
nomic production  is  not  the  totality,  but  only 
the  residue,  of  the  product.  Enterprisers  are 
indeed  members  of  the  community  and  any 
success  attained  by  them  is  an  item  of  the  gen- 
eral welfare.  It  is  also  true  that  the  appro- 
priators  of  opportunities,  savers  of  capital,  and 
furnishers  of  co-ordination  are  members  of  the 
community  and  any  weal  obtained  by  them  is 
an  item  of  the  general  weal.  But  it  is  very  far 
from  true — and  this  is  what  is  really  assumed 
in  the  dogma  of  laissez-faire — that  the  enter- 
priser in  utilising  an  opportunity  will  be  careful 
to  preserve  its  whole  productive  power.  On 
the  contrary  he  can  benefit  himself  only  by 
restricting  the  total  amount  of  benefit  which 
the  new  opportunity  is  capable  of  yielding  as  a 
facility  in  production.  Neither  will  the  enter- 
priser, in  his  employment  of  capital,  give  any 


296    Enterprise  and  Production 

thought  to  stimulating  accumulation  by  so 
using  it  as  to  widen  the  field  for  investment, 
unless  there  will  result  an  extra  profit  for  him- 
self. Thus  he  would  never  buy  a  machine 
which  would  produce  only  at  the  same  cost  as 
the  labour  it  supplanted,  although  his  doing 
this  would  be  a  distinct  gain  to  the  community, 
for  by  the  supposition,  the  labour  required  to 
produce  the  machine  is  not  only  necessarily 
less  than  the  labour  released  by  its  use,  by  at 
least  the  profit  and  interest  on  the  investment, 
but  it  will  of  course  be  appreciated  by  econo- 
mists without  further  argument  that  the  profit 
and  interest  on  the  capitalised  value  of  such  a 
machine  would  be  a  net  addition  to  the  total 
yearly  income  of  the  community,  because  the 
supplanted  labour  will  continue  production  and 
the  investment  will  be  made  by  capital  that 
could  not  have  been  accumulated  if  this  place 
for  it  had  not  been  made.  The  whole  cost  of 
the  machine  is  therefore  a  permanent  addition 
to  the  productive  capacity  of  the  community. 
Nor  will  the  enterpriser,  as  such,  do  anything 
to  increase  the  efficiency  of  labour  unless  he 
can  discover  an  extra  profit  for  himself  in  the 
change.  Thus  he  would  not  hesitate  to  em- 
ploy a  process  that  would  employ  one  hundred 
men  at  a  dollar  a  day,  instead  of  one  producing 
the  same  result  by  the  labour  of  eleven  skilled 


Labour  297 

workmen  at  ten  dollars  a  day,  despite  the  fact 
that  his  doing  so  would  result  in  a  benefit 
to  the  whole  community  of  what  eighty-nine 
common  labourers  could  earn,  together  with  a 
profit  on  the  wages  paid  them,  less  the  cost  of 
educating  the  eleven  skilled  workmen.  The 
criticism  of  this  example,  that  some  may  be 
tempted  to  make,  is  readily  seen  to  be  absurd  ; 
namely  that  the  value  of  the  labour  of  the  eighty- 
nine  released  labourers  is  presumably  the  same 
as  the  cost  of  educating  the  eleven.  According 
to  this,  if  the  average  working  life  is  taken  at 
thirty  years,  it  would  require  the  equivalent  of 
over  two  hundred  andseventy  years  of  common 
labour  to  educate  one  of  our  skilled  workmen, 
or  in  other  words  the  sacrifice  of  nine  working 
lives  to  make  another  working  life  about  nine 
times  as  productive.  Skill  is  worth  many 
times  its  cost  of  acquisition. 

Neither  will  the  individual  enterpriser  be  at 
all  influenced  by  what  is  best  for  the  whole  class 
of  enterprisers,  unless  he  is  to  be  individually 
benefited  thereby.  He  will  make  no  personal 
sacrifice  to  raise  the  general  average  of  profit,  or 
to  extend  the  bounds  of  enterprise.  As  we  have 
already  seen,  no  enterpriser  will  engage  in  occu- 
pations of  peculiar  hazard  for  the  average  of  net 
profit  which  will  satisfy  him  for  ordinary  ven- 
tures.    The  business  man  is   satisfied  with  a 


298    Enterprise  and  Production 

small  balance  of  profit  over  loss,  provided  the 
balance  is  reasonably  secure,  but  will  not  em- 
bark in  hazardous  enterprises,  in  which  he  may 
meet  great  losses  unless  there  is  a  chance  of 
profit  more  than  proportionally  greater.  In  a 
long  course  of  extra-hazardous  ventures,  the  net 
difference  between  profits  and  losses  will  neces- 
sarily be  greater,  probably  many  times  greater, 
than  the  net  difference  between  the  profits  and 
losses  of  a  like  number  of  safer  ventures.  Now 
if  we  suppose,  for  the  purposes  of  illustration,  two 
classes  of  ventures,  differing  in  hazardousness, 
in  one  of  which  the  normal  difference  between 
profits  arid  losses  is  five  per  cent,  of  the  capital 
engaged,  while  the  normal  difference  in  the 
other  is  ten  per  cent,  the  more  hazardous  class 
of  enterprises  evidently  yields  to  the  entire  class 
of  enterprisers,  and  through  them  to  the  com- 
munity at  large,  twice  as  much  net  income  of 
profit  as  the  less  hazardous.  The  class  of  enter- 
prisers as  a  whole,  as  well  as  the  community  at 
large,  have  a  distinct  interest  in  the  more  haz- 
ardous enterprises  being  undertaken  by  native, 
and  not  left  to  foreign  undertakers.  According 
to  our  supposition,  the  two  classes  make  equiva- 
lent demands  upon  land,  labour,  and  capital,  but 
if  the  expectation  of  net  profit  in  the  latter  is 
only  ninety-five  per  cent,  greater,  native  enter- 
prisers will  not  engage  in  the  more  hazardous 


Labour  299 

class  of  operations,  despite  the  distinct  ad- 
vantage to  the  class,  as  a  whole,  and  to  the 
community. 

It  is  also  to  be  noted,  though  this  criticism 
does  not  conflict  with  the  old  conception  of 
laissez-faire,  that  enterprisers,  as  such,  can  pay- 
no  regard  to  the  effect  of  their  undertakings 
upon  the  development  of  individual  character, 
and  upon  social  relations— upon  all  the  inciden- 
tal results  that  cannot  be  bought  or  sold — de- 
spite the  fact  that  such  results  may  outweigh 
in  importance  those  possessed  of  value  in  ex- 
change. But,  while  it  is  essential  to  the  ex- 
position of  our  subject  that  these  deficiencies  of 
enterprise  as  the  conductor  of  industry  should 
be  noted,  I  am  far  from  claiming  or  supposing 
that  on  the  whole  the  economic  process  does  not 
result  in  a  far.greaterproduction  than  either  the 
individualistic  or  social. 

I  am  disposed  to  put  great  faith  in  what  may 
be  called  the  unconscious  cerebration  of  the 
race.  A  popular  notion,  persistent  despite 
scientific  exposition  of  its  apparent  falsity, 
usually  has  some  solid  ground  to  stand  on 
which  students  have  overlooked,  and  when  the 
"  man  in  the  street  '*  persistently  refuses  to 
accept  theoretical  conclusions,  not  susceptible 
of  statistical  verification,  the  theorist  should 
search  diligently  for  the  real   reasons  under- 


300    Enterprise  and  Production 

« 

lying  the  practical  rejection  and  neglect  of  his 
apparently  established  conclusions.  Have  we 
not  here  the  real  reason  why  agricultural 
peoples  so  inevitably  adopt  a  protective  policy 
at  certain  stages  of  their  industrial  develop- 
ment, and  why  they  persist  in  believing  it 
advantageous  to  labourers  ?  When  we  once 
recognise  the  importance  to  a  nation  of  its 
labour  force  being  so  utilised  that  its  field  for 
investment  will  be  widened,  and  its  production 
per  capita  will  be  as  great  as  possible  ;  and 
that  enterprise  cannot  be  depended  upon  to 
give  this  direction  to  labour ;  we  surely  can 
find  some  excuse  for  the  state's  interference 
with  the  course  of  industry.  I  cannot  but  think 
that  the  failure  of  most  economists  to  recog- 
nise the  situation  is  due  to  their  not  having 
more  fully  investigated  the  influences  that 
govern  accumulation,  and  the  utilisation  of 
labour  force,  from  which  they  would  have 
learned  that  it  is  the  demand  for  capital, 
exerted  by  enterprisers,  that  determines  the 
amount  that  can  be  accumulated,  and  that 
an  increased  effectual  demand  for  capital  leads, 
by  the  utilisation  of  idle  labour,  inevitably  and 
very  shortly  to  the  supply  of  the  capital  de- 
manded and  from  domestic  sources,  unless  for- 
eign capital  rushes  in  to  fill  the  gap ;  whereas 
an  increased  demand  for  labour  does  not  bring 


Labour  301 

about  any  increase  of  available  labour  force  as 
a  direct  consequence,  and  only  indirectly  leads 
to  an  increase  in  the  supply  after  an  interval  of 
about  eighteen  or  twenty  years,  and  not  even 
then  if,  in  the  meantime,  the  standard  of  living 
has  been  raised.  Is  it  not  just  this  instinctive 
feeling  that  something  can  be  gained  by  divert- 
ing its  labour  force  to  industries  requiring  more 
skilled  labour,  more  capital  per  workman  en- 
gaged, and  with  a  higher  normal  rate  of  net 
profit,  and  that  enterprisers  if  left  to  them- 
selves will  not  naturally  turn  to  industries  of 
the  desired  character,  in  which  labour  can  be 
most  productively  employed,  that  leads  un- 
developed nations  to  offer  enterprisers  the  in- 
ducements afforded  by  protective  duties  ?  To 
verify  this  deduction  so  far  as  possible,  the 
writer  some  years  ago  made  a  statistical  in- 
vestigation of  the  census  reports  for  1880  of 
both  Great  Britain  and  the  United  States, 
with  the  result  that,  in  both  countries,  the 
per  capita  productivity  of  agriculture  appeared 
to  be  only  about  half  that  of  manufacturing 
and  one  third  that  of  commerce.  Statistical 
results  of  this  character  are  not  to  be  sure  very 
reliable,  as  too  much  estimating  and  averaging 
has  to  be  done  to  obtain  them,  but  if  any- 
thing like  this  difference  in  per  capita  produc- 
tivity really  exists — and    that  a  very    great 


302    Enterprise  and  Production 

difference  does  exist  the  figures  show  beyond 
question — there  is  a  material  gain  to  a  nation 
in  diverting  its  labour  from  the  soil  to  the 
arts,  and  still  more  to  commerce— a  gain,  of 
course,  obtained  at  the  considerable  cost  in- 
volved in  the  increased  price  consumers  have 
to  pay  for  protected  commodities.  How  the 
gain  compares  with  the  cost  is  an  open  ques- 
tion, into  which  we  cannot  enter  here,  the  only 
matter  of  theoretic  importance  to  our  argu- 
ment being  the  question  whether  such  a  gain 
can  be  obtained  by  directing  labour  into 
channels  in  which  it  would  not  otherwise  flow. 
It  may,  however,  be  noted  in  this  connection 
that  free  trade  has  in  England,  as  in  every 
other  densely  populated  country,  the  same 
effect  that  protection  has  in  America,  of  di- 
verting labour  away  from  the  soil,  and  that, 
to  the  extent  that  this  is  a  national  advantage, 
the  prosperity  of  England  under  free  trade  is 
hardly  an  argument  for  the  United  States 
adopting  that  policy.  There  is  also  consider- 
able historical  verification  of  the  position  that 
the  character  of  a  nation's  industries  is  the  prin- 
cipal cause  of  her  industrial  failure  or  success. 
From  the  time  nations  commenced  to  trade 
with  each  other,  those  with  the  most  produc- 
tive soils — with  what  are  spoken  of  as  the 
greatest   natural  advantages, — and  which,  ac- 


•   Labour  3^3 

cording  to  the  commonly  accepted  theories, 
should  have  been  the  richest,  have  invariably 
been  poorer  than  those  nations  that  were 
forced  into  manufacture  and  commerce,  be- 
cause their  soil  was  inadequate  for  their 
support.  Tyre,  Sidon,  Athens,  Carthage,  Ven- 
ice, Genoa,  Florence,  Holland,  and  England 
have  in  turn  held  the  supremacy  in  wealth. 
The  assertion  is  usually  made  that  these  na- 
tions monopolised  manufacturing  and  com- 
merce because  they  had  the  necessary  capital, 
or,  in  other  words,  they  were  commercial 
and  manufacturing  because  they  were  rich, 
and  not  rich  because  they  were  commercial  and 
manufacturing.  But  if  so,  how  did  they  get 
their  start,  handicapped  as  they  were  by  the 
lack  of  natural  advantages  ?  And  how  does  it 
happen  that,  unless  a  protective  policy  has 
been  adopted,  no  nation,  with  fertile  soil  and 
an  abundance  of  it  has  ever  rivalled  them  in 
prosperity  ?  Another  instance  is  to  be  found 
in  the  history  of  European  Jews.  Debarred 
from  agriculture  and  from  many  other  occupa- 
tions, they  were  forced  into  commerce  and 
banking,  the  industries  pre-eminent  over  all 
others  for  the  amount  of  capital  required  per 
capita  and  for  per  capita  productivity.  They 
were  forced  by  restrictive  laws  into  the  widest 
possible  field  for  investment,  and   the  limita- 


304    Enterprise  and  Production 

tions  upon  their  accumulating  were  the  least 
restricting  ;  and  consequently  their  accumula- 
tions were  never  checked,  until  now  they  are  a 
far  richer  people  than  their  former  oppressors, 
and  as  the  direct  result  of  the  very  acts  of  op- 
pression intended  to  impoverish  them. 

The  Theory  of  the  Comparative  Inelasticity 
of  Labour  as  a  Factor  in  Production  seems  to 
me  very  important,  not  only  because  of  its 
corollary,  the  limitation  of  accumulation — for 
of  course  there  is  no  limitation  to  capital  when 
there  is  a  corresponding  increase  in  the  num- 
ber of  existing  labourers, — but  also  because  it 
affords  a  practical  refutation  of  the  dogma  of 
laissez-faire  and  of  the  dogma  of  individualism, 
at  least  in  their  extreme  forms,  and  seriously  un- 
dermines the  major  premise  of  what  has  hith- 
erto been  regarded  by  many  as  an  irrefutable 
objection  to  the  policy  of  protection — the  pre- 
mise namely  that  any  interference  with  the 
natural  course  of  industry  diverts  labour  and 
capital  to  less  productive  employments ;  while 
the  truth  is  that  the  diversion  may  be  only  to 
employments  less  profitable  to  the  individual 
entrepreneur,  but  which  are  nevertheless  more 
productive  because  more  profitable  to  enter- 
prisers as  a  class,  and  beneficial  to  capitalists 
as  a  class  in  widening  the  field  for  invest- 
ment, and  to  controllers  of  opportunities  as  a 


Labour  305 

class  by  making  old  opportunities  more  valu- 
able, besides  affording  an  opening  for  the 
appropriation  of  new  ones,  and  to  labourers  by 
affording  them  both  more  varied  and  constant 
employment  and  a  higher  average  of  wages  in 
more  skilful  occupations.  To  what  extent  pro- 
tective tariffs  have  accomplished  such  results 
does  not  concern  us  here.  It  is  only  the  theo- 
retic possibility  in  which  we  are  interested,  and 
that  I  believe  is  now  estabHshed. 

As  I  hope  to  show  later,  this  theory  of  the 
comparative  inelasticity  of  the  labour  force, 
with  its  corollary  of  the  periodic  pressure  of 
capital  upon  its  limitations,  also  sheds  some 
light  upon  the  great  question  of  trade  unionism 
and  the  trusts,  and  is  indeed  essential  to  any 
well  proportioned  conception  of  the  industrial 
organism  and  its  natural  operations  and  evolu- 
tions. As  the  accumulation  of  capital  and  the 
appropriation  of  opportunities  naturally  adjust 
themselves  to  the  productive  capacity  of  la- 
bour, the  real  secret  of  national  wealth  is  to  be 
found  in  such  employment  of  a  nation's  labour- 
ers as  will  result  in  the  largest  production  per 
capita,  leaving  accumulation  and  appropriation 
to  adjust  themselves  to  the  exigencies  of  the 
industrial  situation. 


CHAPTER  X 
THE  PRODUCTIVE  PROCESS 

TO  recapitulate,  in  a  more  condensed  and 
consecutive  arrangement,  the  view  of  the 
productive  process  here  taken  is  as  follows : 

The  result  of  every  volitional  human  activity, 
physical  or  mental,  is  a  product,  whether  it  be 
a  thought,  an  emotion,  an  idea,  or  a  sensation, 
or  whether  it  is  embodied,  either  in  a  service 
or  in  a  material  commodity  capable  of  satis- 
fying some  human  desire  either  immediately  or 
indirectly. 

That  the  inevitable  condition  of  creating,  or 
continuing  to  possess,  a  product  is  the  sub- 
jecting oneself  to  the  risks  and  responsibihties 
attached  to  its  possession.  The  net  effect  of 
the  product  upon  the  weal,  or  physical,  intel- 
lectual, social,  or  moral  well-being,  of  its  pos- 
sessor, after  the  cost  of  obtaining  it  is  allowed 
for,  is  necessarily  uncertain,  and  always  there- 
fore an  "unpredetermined  residue"  or  ** profit," 
and  is  the  distinct  result,  incentive  to,  and 
306 


The  Productive  Process       307 

reward  of  the  involved  assumption  of  responsi- 
bility. And  as  net  results  of  this  character  are 
the  only  ends,  or  purposes,  of  psychical  and 
physical  activity,  the  hope  or  expectation  of 
profit  is  the  sole  inducement  to  every  volitional 
human  thought  or  action.  The  individual 
therefore  in  whom  ownership  of  a  product  first 
inheres  is  its  only  producer  in  the  strict  sense 
of  the  word,  just  as  it  is  the  man  who  pays  for 
having  it  dug  who  digs  the  ditch,  and  not  the 
owner  of  the  land  or  of  the  spade  or  of  the 
muscular  force  employed. 

In  the  creation  and  continued  possession  of 
a  product  there  is  always  involved  the  exercise 
of  two  or  more  of  the  four  productive  functions, 
one  of  them  as  cause  or  purpose  and  the  others, 
in  a  subsidiary  capacity,  as  means.  To  assert 
that  an  individual  can  exercise  the  dominant 
function  without  also  exercising  one  or  more  of 
the  subsidiary  functions,  is  really  to  assert  that 
it  is  possible  to  accomplish  an  end  without 
adopting  any  of  the  necessary  means.  Any  one 
desirous  of  subjecting  himself  to  the  responsi- 
bilities and  risks,  inseparably  attached  to  the 
attainment  of  a  desired  result,  can  create  or  pos- 
sess it  only  by  establishing  certain  space  rela- 
tions, if  the  product  has  a  material  embodiment, 
or  certain  relations  of  juxtaposition  in  thought, 
if  it  is  to  have  no  physical  embodiment.     To 


3o8    Enterprise  and  Production 

establish  such  relations  physical  effort  is  re- 
quired for  those  with  a  physical  embodiment, 
and  mental  effort  for  those  without,  as  well  as 
for  the  intelligent  direction  of  physical  effort, 
which  would  necessarily  be  purposeless  other- 
wise. A  mental  effort  always,  and  some  phy- 
sical  effort  usually,  is  necessarily  involved  in  the 
exercise  of  choice,  inseparable  from  the  assump- 
tion of  responsibility,  as, though  wemay  delegate 
to  others  the  selection  of  the  responsibilities 
we  are  to  assume,  we  must  at  least  choose  the 
choosers.  These  efforts  of  the  individual  entre- 
preneur together  with  the  similar  efforts  of  those 
he  employs  constitute  the  productive  force 
Labour,  which  is  necessarily  involved  in  the 
creation  of  every  product  as  above  defined,  as 
well  when  the  enterpriser  exerts  himself  as 
when  he  pays  others  to  exert  themselves  for 
him. 

But  the  space  relations,  or  co-ordinations  of 
material  things,  which  it  is  the  special  function 
of  the  subsidiary  productive  factor  "  labour  "  to 
establish,  cannot  be  brought  about  instantane- 
ously in  all  instances.  In  case  the  product  is  a 
personal  service  rendered  to  oneself  or  to  an- 
other, there  is  no  interval  of  time  between  pro- 
duction and  consumption,  and  the  same  is  true  of 
all  immaterial  products  such  as  thoughts,  emo- 
tions, or  ideas,  and  all  products  involving  place 


The  Productive  Process       309 

relations  not  those  of  space.  There  always  exists 
however  an  interval  of  time  between  the  initial 
step  in  the  creation  of  a  material  commodity  and 
its  final  consumption,  and  for  such  products  a 
time  relation  must  be  established.  Such  re- 
lations are  not  formed  by  anything  that  man  can 
do,  but  by  what  he  refrains  from  doing.  Pro- 
ducts, whether  finished  or  unfinished,  accumu- 
late as  space  relations  are  set  up,  if  we  refrain 
from  consuming  or  destroying  them.  Unless  we 
interfere,  time  relations  establish  themselves. 
This  abstinence,  or  refraining,  is  the  function 
performed  by  the  capitalist.  The  results  of 
space  relations  necessarily  persist  so  long  as  we 
preserve  instead  of  consume  them,  and  accumu- 
late so  long  as  we  continue  to  add  new  space 
relations  to  them.  Individualistic  and  social 
capital  may  possibly  be  said  to  consist  of  the 
material  commodities  preserved  because  they 
are  preserved  for  themselves.  Economic  capi- 
tal however  does  not  consist  of  the  material 
things  actually  preserved,  but  in  the  command 
over  utilities  in  general  afforded  by  them,  be- 
cause material  commodities  held  for  a  market 
are  not  preserved  for  themselves,  but  for  their 
attribute  of  purchasing  power,  and  also  because 
they  are  not  preserved  by  the  accumulator  of 
capital  but  by  the  enterpriser.  Economic  capi- 
tal is  not  therefore  the   heterogeneous  mass 


3IO    Enterprise  and  Production 

of  existing  commodities  in  which  it  is  invested, 
but  the  sum  of  their  power  to  purchase.  The 
distinction  is  easily  comprehended,  being  indeed 
the  same  as  that  between  a  house  or  farm,  and 
the  mortgage  upon  them.  Capital  is  not  all 
material  wealth  itself,  but  a  claim  on  all  ma- 
terial wealth.  To  suppose  that  capital  is  the 
thing  in  which  it  is  invested,  is  to  involve  one- 
self in  a  contradiction  of  terms,  which  seems  to 
have  been  generally  disregarded.  When  the 
possessor  of  any  specific  thing  preserves  it 
merely  for  the  purpose  of  consuming  it  himself 
at  a  later  period — when  its  marginal  utility  will 
be  increased,  since  otherwise  he  would  not  pre- 
serve it — he  indeed,  as  an  individual,  retains  the 
specific  thing  for  itself,  but  the  "capital  goods'* 
saved  is  not  an  economic,  but  an  individualistic, 
quantity,  for  there  is  neither  a  creation  nor  a 
prolongation  of  purchasing  power.  Moreover, 
as  in  retaining  the  thing  itself  the  saver  assumes 
the  risk  of  ownership,  he  holds  possession  of  it 
as  an  individualistic  enterpriser,  and  not  as  an 
individualistic  capitalist.  When  however  the 
thing  is  saved  not  for  itself  but  for  its  purchas- 
ing power,  what  the  saver  retains  as  an  economic 
capitalist  is  not  the  thing  itself,  but  its  power 
to  purchase,  which  he  necessarily  holds  in  the 
form  of  an  unforeclosed  claim  on  "capital  goods" 
actually  owned,  retained,  and  held  by  some  one 


The  Productive  Process       311 

else,  or  by  himself  in  another  capacity.  If  he 
retains  the  thing  itself  he  does  so  as  its  owner 
— that  is  as  an  enterpriser  and  not  as  a  capitalist. 
What  he  retains  purely  as  a  capitalist  is  merely 
a  certain  command  over  utilities  in  general, 
which  command  he  is  able  to  transfer,  for  a 
period  agreed  upon,  to  any  one  desirous  of 
actual  ownership  with  its  attendant  risks  and 
responsibilities.  Economic  capital,  or  to  adopt 
the  prevailing,  though  somewhat  inaccurate 
phraseology,  "  economic  circulating  capital,"  is 
not  therefore  a  stock  of  commodities  but  a  fund 
of  general  purchasing  power,  as  is  evident  when 
we  consider  the  character  of  the  income  arising 
from  each.  The  command  over  the  fund,  or  the 
privilege  of  applying  its  power  to  purchase,  is 
paid  for  by  an  interest  charge,  but  when  the 
fund  is  invested  in  specific  commodities  the 
income  derived  from  their  retention  is  always 
greater  or  less  than  interest.  The  enterpriser's 
command  over  the  fund  is  in  abeyance  so  long  as 
the  investment  lasts,  and  when  the  investment  is 
realised — when,  that  is,  the  goods  in  which  the 
fund  was  invested  are  sold — the  fund  reappears, 
but  in  an  augmented  or  diminished  form  as  the 
case  may  eventuate,  the  difference,  less  any  costs 
incurred,  being  a  profit.  It  is  evident  of  course 
that  it  is  the  gain  arising  from  what  others  are 
willing  to  pay  for  the  privilege  of  acquiring  and 


312    Enterprise  and  Production 

retaining  "capital  goods"  which  is  the  reward 
of  abstinence,  and  the  net  gain  arising  from 
the  possession  and  retention  of  the  actual  com- 
modities invested  in  has  no  relation  to  ab- 
stinence, except  as  the  interest  charge  on  an 
investment  is  a  cost,  which  the  actual  owner  of 
anything  has  to  consider  when  determining  the 
advisability  of  retaining  his  ownership. 

When  capital  is  invested  inland  or  some  other 
form  of  "fixed  capital"  the  situation  is  some- 
what complicated  by  the  fact  that  the  individual 
capitalist  retains  the  title  to  the  thing  itself 
in  which  his  capital  is  invested.  He  therefore 
necessarily  subjects  himself  as  an  individual  to 
the  risk  of  change  in  the  value  of  his  property, 
to,  that  is,  a  profit  or  a  loss  as  the  case  may  be. 
As  an  individual  therefore  he  is  to  that  extent 
an  enterpriser  also.  What  he  does  when  he 
hires  out  or  rents  his  property  to  another  en- 
terpriser, is  to  transfer  to  that  other  its  use,  or 
in  other  words  the  relative  advantage  in  pro- 
duction afforded.  He  foregoes  and  gives  up  the 
interest  he  might  have  obtained  by  loaning  in- 
stead of  investing  his  capital,  in  exchange  for 
the  market  value  of  the  use  of  the  "  fixed  capital " 
he  has  invested  in.  Having  exchanged  an  in- 
come regulated  by  the  laws  governing  interest 
for  an  income  regulated  by  the  tendencies  gov- 
erning the  worth  of  special  uses,  he  has  changed 


The  Productive  Process       313 

his  economic  function.  He  cannot  longer  be 
accurately  spoken  of  as  a  capitalist  so  long  as 
he  retains  his  title  to  land  or  other**  fixed  capital." 
As  owner  of  **  fixed  capital "  he  is  not  a  refrainer 
or  abstainer  but  a  furnisher  of  opportunity. 
His  claim  upon  utilities  in  general  has  been 
abandoned  for  a  claim  on  a  specific  or  *'  fixed  " 
article,  the  use  of  which  will  yield  him  an  in- 
come of  rent. 

If  now,  to  complete  our  analysis,  we  suppose 
the  ** landlord"  to  mortgage  his  property, the 
distinction  between  his  function  and  that  of 
the  capitalist  becomes  yet  more  apparent.  The 
owner  of  the  mortgage  is  not  the  owner  of  the 
property,  but  only  of  a  claim  upon  the  property, 
and  his  income  is  interest  plus  an  element  of 
profit  so  far  as  risk  is  involved  and  rewarded. 
The  gross  income  the  giver  of  the  mortgage 
derives  from  the  property  is  the  value  of  its 
use,  and  this  gross  income,  and  not  the  interest 
on  the  mortgage  (even  when  the  property  is 
mortgaged  to  its  full  value),  is  an  element  in 
the  cost  of  production  to  the  enterpriser  who 
utilises  the  fixed  capital  involved.  The  inter- 
est on  the  mortgage  is  a  cost  to  the  mortgager 
only.  Just  as  the  enterpriser  who  employs  his 
own  capital  must  be  regarded  as  loaning  it  to 
himself,  so  the  landlord  who  owns  his  land 
must   be   regarded   as   loaning  to  himself  the 


314    Enterprise  and  Production 

capital  invested  in  his  land.  To  both  of  them 
interest  is  a  cost  to  be  deducted,  in  the  one 
case  from  gross  profits  and  in  the  other  from 
gross  rentals.  Just  as  profits  may  more  than 
cover  interest  charges,  so  rentals  may  also — or 
they  may  both  be  less.  The  point  of  theoretic 
importance  is  that  rentals,  as  well  as  profits,  are 
regulated  by  different  laws  or  tendencies  from 
those  governing  pure  interest. 

As  there  are  many  ways  of  securing  any 
special  result,  it  is  evident  that  some  of  these 
ways  will  involve  on  the  one  hand  more  effort 
in  the  establishment  of  space  or  place  relations 
than  others,  and  on  the  other  hand  a  longer 
interval  of  time — that  is  the  estabHshing  of 
more  or  longer  time  relations — than  others. 
The  enterpriser  able  to  accomplish  his  purpose 
in  the  shortest  interval  of  time  and  with  the  least 
effort  in  the  establishment  of  space  relations, 
or  at  the  lowest  joint  cost  of  both,  will  mani- 
festly have  an  advantage  over  his  competitors, 
and  will  pay  something  for  the  opportunity. 
What  he  pays  for  is  neither  a  space  relation 
nor  a  time  relation,  but  the  privilege  of  partly 
avoiding  the  establishment  of  both  or  either  of 
them — or  in  other  words  a  "  relation  of  advant- 
age." Such  opportunities,  or  advantages,  may 
be  embodied  in  material  things  such  as  land, 
water  power,  mines,  factories,  tools,  machines. 


The  Productive  Process       315 

or  dwellings ;  or  in  immaterial  things  such  as  a 
secret  process,  an  idea,  or  a  privilege  conferred 
by  law,  or  even  one  conferred  by  custom  ;  but 
while  the  permanence  of  an  advantage  is  af- 
fected by  the  nature  of  its  embodiment,  its 
character  is  not.  The  obtaining  of  the  advant- 
age, conferred  by  these  embodiments  of  oppor- 
tunity, sometimes  involves,  to  be  sure,  the 
establishment  of  other  space  relations  and  time 
relations ;  and  retaining  them  for  use  always 
involves  the  further  establishment  or  preserva- 
tion of  time  relations ;  but,  further  than  the 
fact  that  they  will  not  be  so  invested  if  the  value 
of  the  advantage  conferred  is  less  than  the  cost 
of  establishing  the  involved  time  and  space  re- 
lations, plus  a  normal  profit  to  cover  uncertain- 
ties, the  limit  of  what  the  enterpriser  will  pay 
for  them  does  not  depend  upon  their  cost  of 
production,  but  upon  the  advantage  they  will 
give  him  over  his  marginal  competitors,  less  any 
advantage  he  had  before ;  or  if  there  are  no 
competitors,  as  is  the  case  in  individualistic 
production,  upon  the  saving  from  his  own  pre- 
vious cost  of  production.  In  other  words,  as  the 
creator  of  an  opportunity  would  not  have  ap- 
propriated it  if  he  had  not  believed  he  would 
better  himself,  there  is  always  an  element  in  its 
value  that  has  been  obtained  in  excess  of  cost, 
inclusive  of  a  normal  profit — that  is,  opportuni- 


3i6    Enterprise  and  Production 

ties  are  always  partly  made  and  partly  seized ; 
and  the  proportion  between  the  two  factors 
may  vary  in  each  instance  to  the  extent  that 
either  one  of  them  becomes  an  almost  negli- 
gible quantity.  Thus  unimproved  land  and 
patent  rights  are  almost  entirely  appropriations, 
while  a  carpenter's  tools  or  the  machinery  of  a 
factory  seldom  possess  much  value  above  their 
cost  of  reproduction.  That,  however,  the  two 
extremes  belong  to  the  same  category  is  shown 
by  the  fact  that  circumstances  are  constantly  oc- 
curring in  which  the  almost  negligible  quantity 
of  the  latter  is,  as  it  were,  resurrected — as  when 
a  sudden  change  in  trade  conditions  enables  an 
owner  of  machinery  or  tools  to  exact  a  monopoly 
price  for  their  use,  or  to  sell  them  above  cost  of 
reproduction.  But  that  opportunity  furnished 
is  the  essential  characteristic  of  all  implements 
— all  "  fixed  capital  '*  as  well  as  land — is  still 
more  strikingly  shown  by  the  fact  that  their 
owners,  unless  desirous  of  quitting  the  business, 
would  not  part  with  them  at  the  cost  of  repro- 
duction unless  they  believed  themselves  able  to 
replace  them  with  other  similar  implements  at 
or  below  the  price  they  sold  at ;  whereas  the 
owner  of  a  commodity  held  for  sale  and  not 
for  use  would  still  part  with  it  at  its  market 
price  (or  cost  of  reproduction),  although 
he  believed   he    could  not    make    or    buy  a 


The  Productive  Process      317 

duplicate  at  or  below  the  price  at  which  he 
sold  it. 

The  principles  governing  uses  are  not  at  all 
altered  by  the  facility  afforded  being  an  abso- 
lutely essential  one.  Many  products  cannot 
be  produced  at  all  except  by  the  use  of  land. 
Land  is  therefore  an  absolutely  essential  facil- 
ity. The  same  is  true  of  the  facility  afforded 
by  patent  rights,  when  the  patented  article  or 
some  substitute  can  be  produced  in  no  other 
way.  If  the  whole  earth  were  owned  by  one 
person,  or  by  a  combination  of  persons,  and 
the  patented  article  were  an  essential  of  life, 
both  these  facilities  would,  in  a  certain  sense, 
be  absolute.  Short  of  this  however  they  are 
relative,  just  as  all  other  advantages  in  produc- 
tion are,  and  subject  to  the  same  general  laws 
or  tendencies,  although  of  course  in  some  minor 
particulars  the  tendencies  affecting  them  may 
differ. 

The  result  of  every  human  volition  is  there- 
fore a  product,  the  creation  of  which  involves 
the  establishment  of  one  or  more  of  three 
kinds  of  relations — namely  relations  of  place 
or  space,  of  time,  and  of  advantage.  When 
the  product  has  no  material  embodiment  it  is 
correctly  spoken  of  as  a  service,  and  as  a  com- 
modity when  it  has  a  material  embodiment. 

Services  can  be  rendered  either  to  oneself  or 


31 8    Enterprise  and  Production 

to  another.  When  rendered  to  oneself  they 
may  be  either  psychical  or  physical.  In  the 
first  case  they  are  thoughts  or  emotions  and 
result  from  the  juxtaposition  or  association  of 
ideas,  and  the  only  subsidiary  productive  fac- 
tor involved  is  that  of  mental  labour.  In  the 
second  case,  where  they  affect  the  body,  mus- 
cular labour  and  therefore  physical  effort  is 
necessary.  And  when,  to  facilitate  the  crea- 
tion of  the  necessary  space  relations,  a  tool  is 
employed,  an  advantage  is  appropriated,  an 
abstinence,  covering  the  making  and  preserv- 
ing of  the  tool  and  preserving  the  raw  material, 
exercised.  Thus  all  four  of  the  productive 
factors  are  brought  into  play  by  so  simple  an 
individualistic  act  as  fanning  oneself  with  a 
home-made  fan. 

When  an  unaided  individual  makes  a  purely 
hand-made  article  for  his  own  future  consump- 
tion, we  have  a  commodity  in  whose  creation 
enterprise,  labour,  and  capital  have  been  in- 
volved, and  opportunity  also  when  the  article 
is  tool-  or  machine-made. 

The  peculiarity  of  individualistic  activity  is 
that  all  the  four  productive  functions  are  ex- 
ercised by  the  same  individual,  to  whom  the 
entire  result  accrues  without  any  deduction 
of  what  has  to  be  paid  to  others.  Conse- 
quently the  care  of  the  creator  of  the  product 


The  Productive  Process       319 

is  not  at  all  that  his  share  as  an  enterpriser 
should  be  relatively  large,  but  that  the  total 
result  due  him  for  exercising  two  or  more  of 
the  productive  functions  should  be  as  great  as 
possible.  The  motives  governing  his  final  vo- 
lition may  have  their  origin  in  four  distinct 
sources,  between  which  however  he  does  not 
distinguish.  His  sole  interest  is  in  the  final 
result,  and,  provided  that  is  obtained  with  the 
least  possible  sacrifice  on  his  part,  the  propor- 
tion in  which  it  is  to  be  attributed  to  each  one 
of  its  four  sources  is  not  only  a  matter  of  in- 
difference, but  impossible  of  any  solution  at  all 
accurate. 

The  individual  however  is  far  from  indiffer- 
ent as  to  whether  he  can  secure  greater  and 
better  results  by  combining  his  activities  with 
those  of  his  fellow-men.  A  very  large  propor- 
tion of  desired  benefits  are  better  reached  by 
individual  effort,  and  a  very  considerable  pro- 
portion can  only  be  so  obtained.  We  have  to 
think  out  our  own  thoughts  and  feel  our  own 
emotions.  The  words  of  others,  spoken  or 
written,  aid  to  be  sure  by  suggestion,  and 
when  they  do,  if  they  have  cost  us  anything, 
such  as  the  price  of  a  book,  the  resulting  ideas 
and  emotions  would  be  products  of  combined 
activities  were  it  not  that  we  should  consider 
the  book  as  becoming  an  individualistic  com- 


320    Enterprise  and  Production 

modity  when  it  was  bought  or  rented  for  pri- 
vate use.  The  moment  anything  passes  into 
the  hands  of  its  final  consumer,  or  user  to  con- 
sume the  result,  it  becomes  an  individualis- 
tic quantity,  no  matter  how  it  originated.  Its 
disposition  thereafter  is  a  matter  entirely  per- 
sonal to  its  possessor.  Individualistic  activity 
is  purely  personal  both  in  its  object  and  in  the 
methods  adopted  to  secure  the  object,  though, 
as  we  have  seen,  it  can,  and  does,  avail  itself 
of  productive  factors  of  the  same  general  char- 
acter as  the  other  productive  processes,  and 
also  of  the  results  of  economic  and  social 
endeavour. 

Services  are  also  rendered  by  one  person  to 
another,  or  by  land  or  *'  fixed  capital "  owned 
by  another,  and  are  then  of  course  products  of 
the  combined  activity  of  different  individuals, 
and,  as  such,  are  not  individualistic  at  the  time 
of  rendering  or  sale,  but  become  individualistic 
after  the  transfer — as  is  also  the  case  with  all 
commodities  in  the  hands  of  their  final  con- 
sumer. How  the  final  purchaser  utilises  his 
purchase  is  a  purely  personal  matter.  Individ- 
ualism as  a  science  has  for  its  subject  all 
uncombined  activities — all  the  daily  actions  of 
home  and  private  life — which  taken  in  mass 
greatly  outnumber  combined  activities ;  which 
latter,   however,   gain   in   relative   importance 


The  Productive  Process      321 

from  the  fact  that  they  furnish  the  basis  with- 
out which  the  greater  part  of  present  individ- 
ualistic activities  would  be  impossible,  as  they 
bring  within  the  consumer's  reach  the  economic 
and  social  products  essential  to  the  very 
existence  of  much  the  greater  part  of  his 
individualistic  actions. 

When  the  individual  seeks  his  personal  ends 
by  combining  with  others,  the  question  of  the 
division  of  the  product  at  once  arises.  If  the 
products  are  thrown  into  a  common  fund,  from 
which  each  one  helps  himself  as  occasion  offers, 
a  process  which  is  at  present  applicable  only  to 
a  limited  kind  of  products,  such  as  a  public 
park,  or  to  the  various  services  rendered  by  the 
state,  or  if  the  division  is  a  pro  rata  one,  the 
incentive  to  productive  activity  is  weakened 
proportionately  to  the  size  of  the  group.  It 
will  work  well  enough  in  a  partnership  of  three 
or  four,  especially  when  they  all  contribute  the 
same  productive  factor,  because  they  naturally 
watch  each  other,  and  are  aware  of  their  part- 
ners* productive  value,  and  either  dissolve  the 
firm  or  change  the  division  of  the  gains  if  any 
member  fails  to  contribute  about  his  quota  to 
the  results  attained.  This  mutual  judgment 
and  ability  to  rectify  errors  in  judgment  be- 
comes more  and  more  difficult  as  the  size  of 
the   group   and    the    diversity   in  ability   and 


32  2    Enterprise  and  Production 

function  of  the  individuals  composing  the 
group  increase,  and  a  corresponding  decrease 
in  productive  efficiency  is  of  course  involved. 
It  is  practically  impossible  to  form  combina- 
tions of  this  kind  between  persons  exercising 
different  productive  functions  unless,  as  in 
farming  on  shares,  each  group  is  very  small. 
Moreover  in  many  cases  the  product  of  com- 
bined efforts  is  not  a  divisible  one,  nor  is  it 
always  something  the  joint  producers  can  either 
use  personally  or  exchange.  An  actual  division 
of  the  joint  product  is  in  many  cases  impossible 
and  in  other  cases  inadvisable. 

Nevertheless  there  is  considerable  field  for 
combination  founded  upon  a  division  of  the 
actual  product  more  or  less  unrelated  to  pro- 
ductive efficiency.  The  principal  instances  have 
already  been  mentioned,  and  it  is  to  be  observed 
that  in  such  combinations  as  partnership  and 
farming  on  shares,  which  is  also  really  only  a 
form  of  partnership,  it  is  only  the  contribution 
of  each  partner  to  the  general  result  which  is 
lacking  in  the  prearranged  definiteness  which 
marks  an  economic  combination.  If  we  regard 
a  partnership  as  an  economic  person,  its  rela- 
tions to  its  environment  are  purely  economic. 
In  what  degree  its  internal  relations  are  also 
economic  depends  upon  the  degree  of  definite- 
ness with  which  the  interest  of  each  partner  is 


The  Productive  Process       323 

proportioned  to  and  varies  with  his  productive 
efficiency.  If  the  group  is  small  or  if,  as  in 
a  stock  company,  each  contributes  definite 
amounts  of  the  same  productive  factor,  this 
definiteness  is  practically  entire,  but  the  larger 
the  combined  group,  and  the  more  diverse  the 
functions  exercised  by  the  contributing  individ- 
uals composing  it,  the  less  definite  becomes 
the  relation  of  the  reward  to  the  contribution 
— that  is  the  internal  relations  of  the  group 
become  more  social  and  less  economic. 

A  wider  field  for  production,  under  the  in- 
centive of  a  non-prearranged  division  of  the 
actual  product,  is  to  be  found  in  the  operations 
of  the  state  and  in  other  large  social  bodies. 
Here  we  have  products  such  as  a  public  park, 
or  a  free  concert,  and  the  services  of  courts  of 
justice  or  the  army,  paid  for  out  of  taxes,  and 
enjoyed  not  only  by  the  contributory  tax- 
payers but  also  by  the  whole  population  as 
they  please  and  as  it  happens,  subject  only  to 
such  regulations  as  the  state  imposes. 

Lastly  we  have  municipal  or  state  ownership 
and  operation  of  public  utilities,  in  which  the 
state  assumes  the  function  of  enterpriser  but 
not  for  the  purpose  of  reaping  a  profit — the  na- 
tural reward  of  enterprise — or  if  a  profit  is  sought 
it  is  usually  a  monopoly  profit,  founded  on  the 
monopolisation    of   pre-existing  facilities,   and 


324    Enterprise  and  Production 

more  in  the  nature  of  a  tax  than  a  legitimate 
return  to  enterprise.  We  have  already  had  oc- 
casion to  observe  that  a  monopoly  of  this  char- 
acter is  especially  detrimental,  as  the  sum-total 
produced  and  enjoyed  by  consumers  is  neces- 
sarily decreased  by  raising  the  price  of  the  pro- 
duct above  its  natural  level,  and  the  injury 
inflicted  upon  the  community  is  always  greater 
than  the  extra  revenue  derived  by  the  state, 
and  is  never  compensated,  as  is  the  case  when 
private  individuals  seize  upon  a  neglected 
opportunity,  by  any  gain  in  productive  power. 
When  however  the  assumption  by  the  state  or 
city  of  any  branch  of  industry  is  not  for  the 
purpose  of  obtaining  a  monopolistic  gain,  it 
may  be  highly  advantageous  to  the  community 
as  a  whole.  A  private  enterpriser  may  indeed 
be  a  philanthropist,  and  earnestly  desire  to  bene- 
fit the  contributors  of  land,  capital,  and  labour, 
especially  the  latter,  as  well  as  himself,  but,  un- 
less all  the  other  enterprisers  in  the  same  line 
of  trade  are  like  minded,  he  places  himself  at  a 
competitive  disadvantage  that  will  eventually 
eliminate  him  as  a  producer.  Consequently  he 
will  get  what  he  can  from  his  business,  and  be- 
stow in  benefactions  such  part  of  his  gains  as  he 
feels  he  can  spare  without  perceptibly  crippling 
his  productive  efficiency.  Every  enterprise  has 
a  complexity  of  results,  only  some  of  which  are 


The  Productive  Process       325 

economic  and  have  a  market  value.  The  en- 
terpriser, as  such,  will  take  no  account  of  these 
incidental  results  of  the  occupation  he  is  en- 
gaged in,  except  as  they  react  upon  his  cost  of 
production.  If  his  business  is  an  unhealthy  one 
he  will  indeed  be  forced  to  pay  higher  wages, 
but  he  will  give  no  thought  as  to  whether  the 
wages  he  is  forced  to  pay  are  high  enough  to 
compensate  his  workmen  for  their  maimed 
bodies  and  shortened  lives.  And  if  his  busi- 
ness is  a  more  or  less  disreputable  one,  because 
injurious  to  the  community,  and  involving  there- 
fore some  loss  of  social  prestige,  he  will  utilise 
that  circumstance  to  extort  a  higher  rate  of 
profit  for  himself.  When  therefore  a  business 
has  non-economic  results  either  good  or  bad,  its 
assumption  by  the  state,  with  the  object  in  view 
of  intensifying  the  former  or  diminishing  the 
latter,  is  justified,  even  when  it  is  attended 
by  some  loss  of  economic  efficiency.  The 
more  equable  distribution  of  wealth  however, 
should  not,  it  seems  to  the  writer,  be  reck- 
oned among  the  incidental  benefits  justifying 
public  operation.  Profit  is  the  mainspring 
of  all  human  endeavour,  and  any  interference 
with  its  legitimate  expectation  strikes  at  the 
very  root  of  enterprise  itself,  and  clogs  progress 
by  lessening  its  incentive. 

Combined  social  activities  are  of  two  kinds. 


326    Enterprise  and  Production 

In  the  one  the  product  is  distributed  without 
charge,  and  in  the  other  it  is  sold  just  as  an 
economic  product  is.  About  the  former  no 
difference  of  opinion  is  likely  to  arise,  and  it  is 
only  necessary  to  observe  that  the  real  con- 
tributor of  the  means  of  production  is  the  tax- 
payer, and  not  the  capitalist,  whose  funds  the 
state  borrows,  or  the  labourers,  such  as  judges, 
legislators,  soldiers,  and  policemen,  that  it  hires. 
Their  productive  activity  is  of  course  economic 
because  they  perform  their  part  in  a  combina 
tion  of  human  actions  for  a  purely  personal  and 
predetermined  reward,  which  is  not  however  a 
part  of  the  purchasing  power  to  whose  creation 
their  efforts  have  been  directed,  because  no  such 
purchasing  power  is  created,  but  a  part  of  the 
purchasing  power  contributed  by  the  taxpayers. 
The  product  itself  is  purely  social,  and  cannot 
therefore  be  distributed  in  prearranged  propor- 
tion, nor  can  its  purchasing  power,  for  it  has 
none. 

When  the  product  is  sold  the  case  is  some- 
what different,  and  the  combined  activity  has 
some  resemblance  to  economic  if  we  consider  the 
state  as  an  economic  individual.  Nevertheless 
the  activity  remains  a  social  one  despite  the  fact 
that  it  is  not  the  tax-payers,  but  the  purchasers 
of  the  services  and  commodities  sold  by  the 
state,  who  furnish  the  fund  from  which  the  state 


The  Productive  Process      327 

pays  its  wages,  rents,  and  interest  charges. 
This  case  differs  from  the  first  only  in  the  fact 
that  the  buyers  from  the  state,  as  well  as  the  em- 
ployees of  the  state,  are  governed  by  economic 
motives.  But  as  the  enterpriser  is  the  only  real 
producer,  it  is  the  state  alone  which  is  the  pro- 
ducer of  products  of  this  character,  and  as  the 
state  despite  its  charging  a  price  for  its  products 
is  not  governed  by  economic — that  'is  personal 
— motives  in  fixing  the  price,  such  a  productive 
process  is  not  itself  economic.  To  which  an 
exception  cannot  even  be  made  in  the  hardly 
conceivable  case  of  the  state's  conducting  its 
enterprises  on  strictly  business  principles,  and 
wholly  for  the  profit  to  be  obtained,  without  any 
consideration  for  social  or  ethical  ends,  or  any 
desire  to  modify  distribution ;  as  the  profit  of 
enterprise  is  economic  only  when  it  is  a  prear- 
ranged personal  share  of  the  purchasing  power 
created.  The  gain  of  the  state  from  any  enter- 
prises it  conducts  cannot  be  personal,  for  even 
when  the  state  has  no  social  or  ethical  ends  in 
view  any  purchasing  power  that  accrues  to  it 
from  business  enterprises  conducted  by  it  is  nec- 
essarily devoted  to  a  lessening  of  taxation,  and 
the  ultimate  gain  does  not  really  accrue  to  the 
state  but  is  divided  in  unpredetermined  propor- 
tions among  individual  taxpayers,  who,  as  indi- 
viduals, have  nothing  to  do  with  the  creation  of 


328    Enterprise  and  Production 

the  state's  profit.  The  motive  of  the  state  is 
therefore  necessarily  impersonal,  or  social,  in 
all  such  cases,  and  consequently  any  produc- 
tive process  conducted  by  it  is  social  also.  In 
the  rare  cases  in  which  a  despot,  in  control  of 
state  action,  carries  on  an  industry  solely  for 
his  personal  benefit,  the  business  becomes  a 
personal  undertaking,  and  if  social  in  form  is 
not  so  in  substance. 

It  is  plain  therefore  that  in  social  activity,  as  in 
individualistic,  there  is  no  proper  differentiation 
of  the  dominant  productive  function.  All  that 
either  the  state  or  the  individual  is  concerned 
about  is  the  gross  sum  of  well-being  to  be  ob- 
tained, and  they  are  alike  indifferent  as  to  the 
form  of  income  in  which  the  benefit  appears  or  to 
its  being  proportional  to  contribution.  Though 
always  the  ruling  factor,  enterprise  is  not 
dominant  in  the  sense  of  governing  the  others 
for  its  own  benefit  alone,  and  sacrificing  the  in- 
terests of  their  possessors,  when  they  conflict 
with  the  interest  of  the  enterpriser.  There  is 
also  no  standard  by  means  of  which  any  one  can 
discriminate  and  compare  the  different  parts. 
What  proportion  of  individualistic  and  social 
products  are  properly  attributed  to  efforts  ex- 
erted, what  to  abstinence,  what  to  the  posses- 
sion of  facilities,  and  what  to  the  irksomeness  of 
responsibility  cannot  be  calculated  in  any  but 


The  Productive  Process      329 

the  vaguest  way,  and  that  only  by  borrowing 
the  use  of  the  standard  afforded  by  purchasing 
power,  which  is  only  applicable  by  analogy  to 
things  not  intended  for  exchange  and  not  at  all 
to  results  not  susceptible  of  exchange. 

It  is  just  this  lack  of  quantitativeness  which 
makes  the  sciences  of  Individualism  and  Soci- 
ology so  dependant  upon  the  science  of 
Economics,  which  is  possessed  of  a  quantita- 
tive standard  applicable  by  analogy  to  some 
individualistic  and  social  results.  The  borrowed 
standard  is  indeed  a  very  inadequate  one,  so 
that  the  ultimate  appeal  of  those  sciences 
must  always  be  to  the  individual  conscious- 
ness. These  individualistic  valuations  of  indi- 
vidualistic and  social  results  are  constantly 
being  made  by  every  one,  not  only  as  a  guide 
to  his  own  actions,  but  also  as  a  means  of 
influencing  social  results  so  far  as  he  has  a 
voice  in  their  determination. 

The  understanding  therefore  of  the  interplay 
of  the  productive  factors,  impossible  of  being 
attained  except  through  Economics  (because 
in  economic  activity  alone  the  functions  of 
these  factors  are  clearly  differentiated  and  pos- 
sessed of  a  common  denominator),  is  a  prerequi- 
site to  any  proper  comprehension  of  individual- 
istic and  social  activities.  If  the  principles  here 
enunciated  are  correct,  it  will  hardly  be  claimed 


330     Enterprise  and  Production 

that  a  satisfactory  comprehension  of  these  func- 
tions has  been  arrived  at  in  the  present  state  of 
the  science  of  Economics.  The  distinctions 
universally  regarded  as  fundamental  are  those 
between  the  productive  factors,  and  not  those 
between  the  productive  functions.  As  at  pre- 
sent viewed,  once  a  factor  of  a  certain  kind, 
always  a  factor  of  that  kind,  even  when  the 
function  performed  has  been  changed.  Thus 
slaves  are  still  labourers,  capital  invested  in  land 
improvement  or  even  in  land  creation  is  still 
capital.  More  than  all,  anything  that  can  be 
capitalised  is  capital,  that  is  anything  such  as 
good-will  or  a  patent  right.  Even  land  is  re- 
garded by  some  as  capital,  because  it  has  a  sell- 
ing price  the  interest  on  which  is  equal  to  what 
its  use  is  worth  (a  false  assumption  by  the  way, 
as  the  interest  on  the  selling  price  of  such  things 
is  never  so  great  as  the  value  of  the  use,  as  al- 
lowance is  always  made  for  the  extra  risks  at- 
tendant upon  ownership).  The  fact  has  been 
ignored  that  when  labourers  are  enslaved,  or 
when  capital  has  been  expended  upon  land,  a 
change  of  function  has  occurred,  and  that  when 
good-will,  or  patent  right,  or  land  have  been 
capitalised,  there  has  been  no  change  of  func- 
tion. Misled  by  these  assertions,  popular 
usage  has  gone  so  far  as  to  speak  of  the  bodily 
or  mental  powers  of  the  labourer  as  his  capital. 


The  Productive  Process       331 

Economists  have  not  indeed  gone  to  this  ex- 
treme, but  it  is  difficult  to  give  any  reason 
why  this  popular  expression  is  not  as  logical  as 
those  just  stated,  which  they  certciinly  do  make. 
And  as  a  matter  of  fact  the  power  to  labour  is 
sometimes  capitalised,  as  when  a  stock  advances 
in  price  when  a  new  manager,  known  to  pos- 
sess exceptional  ability,  is  secured.  Further- 
more it  is  currently  assumed  that  capital  is  a 
sum  of  material  things,  although  the  income 
arising  from  the  possession  of  material  things  is 
always  either  a  rent  or  a  profit  and  greater  or 
less  than  pure  interest,  and  never  averages  the 
same  as  pure  interest. 

Manifestly  we  have  here  some  very  serious 
confusions  of  thought,  intensified  and  perhaps 
partly  due  to  the  further  fact  that  economists 
universally  regard  the  four  productive  factors 
as  standing  on  the  same  plane.  That  they  have 
tailed  to  recognise  the  predominance  of  the 
enterpriser  is  undoubtedly  attributable  to  the 
true  character  of  the  function  he  exercises  hav- 
ing been  misapprehended.  Looking  upon  him 
as  a  co-ordinator  connotes  that  his  function, like 
the  others,  is  only  a  means  by  which  the  ulti- 
mate purpose  of  production  is  attained.  It  has 
not  been  perceived  that  he  is  only  a  co-ordinator 
in  the  sense  that  he  directs  co-ordination  for  his 
own  benefit,  or  rather  is  co-ordinated  for.      He 


332     Enterprise  and  Production 

is  the  principal,  they  are  the  agents.  Co-ordina- 
tions of  place  or  space,  of  time,  and  of  advantage 
are  only  the  means  by  which  he  attains  his  end, 
which  is  to  subject  himself  to  the  benefits  of 
ownership  with  its  attendant  responsibilities; 
and  to  define  the  enterpriser  by  one  of  the 
means  he  uses  when  those  means  are  various, 
and  not  by  the  motive  which  prompts  him,  is 
to  violate  two  of  the  most  obvious  principles  of 
classification. 

Economists  are  however  hardly  blamable  for 
these  misconceptions,  as  they,  or  others  like 
them,  were  sure  to  arise  from  the  attempt  to 
define  functions  in  terms  of  the  productive 
factors  which  exercise  or  perform  them.  The 
error  is  only  one  of  omission — a  failure  in  per- 
ception— and  if  scientific  men  were  omniscient 
in  perception  every  science  would  long  ago  have 
been  brought  to  perfection.  A  man  is  a  plough- 
man because  he  ploughs, but  the  converse  propo- 
sition that  because  a  man  is  a  ploughman  what 
he  does  is  ploughing  does  not  hold.  When  the 
ploughman  sows  or  reaps  he  becomes  a  sower  or 
reaper.  As  he  changes  the  function  he  per- 
forms, he  changes  his  character  as  a  factor. 
It  is  the  function  performed  that  makes  the 
factor,  not  the  factor  that  makes  the  function. 
Factors  must  be  defined  in  terms  of  function, 
and  when  the  function  is  a  means,  both  it  and 


The  Productive  Process       333 

its  factor,  must  be  defined  in  terms  of  their  re- 
lations to  the  employer  of  the  means.  Such 
factors  must  be  distinguished  by  the  kind  of 
use  to  which  their  employer  puts  them.  When 
we  seek  to  understand  the  function  by  study- 
ing the  characteristics  of  the  factor  we  put  the 
cart  before  the  horse.  We  are  endeavouring  to 
arrive  at  true  conceptions  by  means  of  the 
inductive,  empirical,  and  historical  method, 
proper  to  the  natural  sciences,  instead  of  by  the 
deductive,  logical,  and  **  orthodox"  method 
proper  to  the  moral  sciences. 

The  true  character  of  the  productive  function 
of  the  enterpriser  once  recognised,  the  whole 
subject  is  cleared  up  at  once  and  we  are  able  to 
view  the  productive  process  as  a  consistent 
whole,  and  by  defining  the  three  subsidiary  pro- 
ductive factors  in  terms  of  their  relation  to 
enterprise,  their  employer,  we  are  able  for  the 
first  time  to  determine  accurately  what  their 
productive  functions  are;  namely  the  establish- 
ment of  space  relations  by  physical,  and  place 
relations  by  mental,  labour ;  of  time  relations 
by  capital ;  and  of  relations  of  advantage,  or 
competitive  relations,  by  opportunity.  We  also 
recognise  that  to  a  certain  extent  the  subsidiary 
productive  factors  are  interchangeable,  or  con- 
vertible into  each  other,  whenever  enterprise 
changes  the  use  to  which  it  puts  them.     The 


334    Enterprise  and  Production 

difference  in  conception  is  perhaps  most  vividly 
illustrated  by  the  classification  of  **  fixed  capital " 
as  **  land  "  (if  the  old  term  is  to  be  retained)  as 
contrasted  with  the  growing  tendency  to  class 
"  land  "  as  only  a  form  of  capital  because  it  has 
a  selling  price,  or  in  other  words  because  its 
value  can  be  capitalised,  or  capital  invested  in 
land.  To  call  the  thing  in  which  capital  is  in- 
vested capital  is  an  especially  naive  contradic- 
tion of  terms.  But  the  attempt  to  bring  land 
within  the  capital  concept  would  never  have 
been  made  by  any  one  who  recognised  that  it 
was  the  use  the  employer  had  for  each  which 
was  fundamental. 

Our  conception  of  the  productive  process  also 
discloses  for  the  first  time  clear  hnes  of  cleavage 
between  individualistic,  social,  and  economic 
actions.  The  distinction  itself  has  been  univers- 
ally recognised  for  ages,  and  its  validity  has 
never  to  my  knowledge  been  called  in  question, 
but  neither  has  any  successful  attempt  to  obtain 
definitions  which  discriminate  the  three  meth- 
ods of  human  activity  been  made.  I  cannot  but 
feel  that  this  is  owing  to  the  insufficiency  of  the 
prevailing  conceptions  of  the  productive  process, 
and  especially  to  the  confessedly  undeveloped 
state  of  the  "  Theory  of  Enterprise."  As  to  the 
conception  of  the  productive  process  here  pre- 
sented, whether  it  be  finally  accepted  or  not,  it 


The  Productive  Process       335 

certainly  discriminates  clearly  between  the  three 
universally  recognised  methods  of  human  ac- 
tivity, and  thus  affords  a  final  and  precise  defin- 
ition for  each  of  them,  which  there  is  a  logical 
necessity  of  accepting  if  my  premises  are  well 
founded. 

Again,  the  treatment  of  Economics  as  a 
science  primarily  concerned  with  the  produc- 
tive factors,  rather  than  as  concerned  with  a 
certain  form  of  combination  among  individuals 
exercising  distinct  productive  functions,  made 
a  definition  of  the  science  impossible,  as  it  led 
to  the  tacit  assumption  that  land,  labour,  capi- 
tal, and  entrepreneurship  were  purely  economic 
terms,  whereas  they  are  really  essential  to  all 
human  activity,  individualistic  and  social  as  well 
as  economic.  Considering  them  as  purely  eco- 
nomic terms  is  practically  to  define  Economics 
as  an  aspect  of  all  human  activity,  and  it  is  not 
only  always  difficult  to  define  an  aspect,  but 
also  not  of  much  use  when  it  is  accomplished, 
because  it  is  constantly  varying  in  degree. 

The  dominance  of  enterprise  in  the  sense  of 
its  being  the  employer  and  director  of  the 
other  factors  once  admitted,  I  do  not  see  how 
any  one  can  deny  the  logical  necessity  of  de- 
fining the  three  subsidiary  factors  in  terms 
of  their  relations  to  it,  that  is  in  terms  of  the 
use  their  employer  has  for  them.     As  we  have 


33^    Enterprise  and  Production 

seen,  this  affects  somewhat  our  conception  of 
labour  and  radically  changes  our  conceptions 
of  capital  and  land.  But  it  does  much  more 
than  this  in  enabling  us  to  understand  the 
manner  of  their  origin  in  the  laws  governing 
appropriation,  accumulation,  and  population. 
The  latter  has  indeed  been  ably  discussed  by 
Malthus  and  others,  so  far  as  it  was  an  individ- 
ualistic matter,  and  some  attention  has  been 
paid  to  the  effects  of  prosperity  and  hard  times 
upon  marriage.  But  the  response  of  popula- 
tion to  the  demand  for  labour  exerted  by 
enterprise  has  not,  so  far  as  I  know,  been  con- 
sidered. And  the  same  is  true  of  the  response 
of  opportunity  and  capital  to  the  like  demands 
of  enterprise.  No  one  seems  to  have  had  even 
a  suspicion  that  any  permanent  industrial  effects 
can  follow  from  the  three  responses  not  being 
equally  quick.  As  we  have  shown,  they  differ 
greatly  in  this  respect,  with  the  result  that  two 
derided  popular  opinions  are  seen  to  have  a 
solid  foundation.  I  refer  of  course  to  the  ideas 
of  a  general  glut  and  a  favourable  balance  of 
trade.  If  the  field  for  investment  is  dependent 
upon  the  growth  of  population  and  advances  in 
the  arts,  which  is  another  phrase  for  the  growth 
of  opportunity,  it  is  surely  evident  that  it  may 
not  widen  fast  enough  to  enable  enterprisers  to 
find  profitable   employment  for  accumulating 


The  Productive  Process      337 

capital.  In  a  progressive  country  this  certainly 
occurs,  and  there  is  therefore  a  periodic  increase 
in  the  pressure  of  capital  upon  its  limitations, 
adjusted  not,  as  economists  seem  to  take  for 
granted,  by  capitalists  obtaining  a  lower  rate  of 
interest,  but  by  a  cessation  of  production  sufifi- 
cient  to  check  accumulation  to  a  point  where 
existing  capital  can  be  employed  at  the  pre- 
vious /ate  of  profit  and  interest,  or  rather 
sufficiently  above  that  rate  to  compensate  en- 
terprisers for  their  losses  during  the  preceding 
period  of  industrial  depression. 

The  importance  of  this  fact  to  the  practical 
application  of  economic  theories  can  hardly  be 
overestimated.  It  explains  the  periodicity  of 
industrial  activity,  the  persistent  belief  in  an 
excess  of  exports  being  favourable  to  a  nation — 
the  explanation  of  which  is  that  home  capital 
is  supplanting  foreign  capital  either  by  invest- 
ment abroad,  or  by  taking  the  place  of  foreign 
capital  at  home,  thus  allowing  accumulation  to 
continue  and  enabling  labour  to  obtain  fuller 
employment.  It  explains  also  the  value  of  col- 
onies, in  their  possession  leading  to  an  export 
of  capital.  It  reverses  also  the  prevailing  idea 
that  industries  requiring  much  capital  are  mo- 
nopolised by  the  prosperous  nations  because 
they  are  rich,  and  it  is  seen  that  these  nations 
are  rich  because  they  have  been  forced  into 


33^     Enterprise  and  Production 

manufacturing  and  commerce  by  their  poverty 
in  agricultural  resources.  It  shows  also  how 
the  poHcy  of  protection  can,  theoretically  at 
least,  benefit  an  agricultural  country  by  divert- 
ing its  labour  from  the  soil  to  the  arts.  Surely 
it  is  not  without  significance  that  all  the  above- 
mentioned  popular  beliefs  which  have  been  so 
persistent,  derided  as  they  have  been  by  schol- 
ars and  unsustained  by  convincing  arguments 
are  now  found  to  rest  upon  a  valid  scientific 
basis. 

It  is  with  great  reluctance  that  I  appear  as 
an  advocate  of  these  "  discarded  heresies."  I 
know  how  others  have  fared  who  have  cham- 
pioned them,  and  that  "  that  way  oblivion 
lies."  They  appear  however  as  legitimate 
corollaries  of  my  original  premises,  and  as  such 
they  must  be  honestly  stated,  even  if  this  leads 
some  to  reject  the  premises  (in  the  establish- 
ment of  which  my  real  interest  lies)  because  of 
the  final  conclusions  to  which  they  lead.  I 
would  state  however  in  mitigation  of  my  of- 
fences, that  the  reasoning  advanced  in  support 
of  these  conclusions  is  new  and  is  by  no  means 
the  purport  of  my  argument,  but  only  inci- 
dental to  it.  I  fail  to  see  how  these  conclusions 
can  be  avoided  when  economic  phenomena  are 
viewed  from  the  standpoint  of  the  enterpriser. 
That   standpoint,  which  no  one  could  be  ex- 


The  Productive  Process       339 

pected  to  take  before  the  peculiar  importance  of 
his  function  was  recognised,  and  which  no  one 
so  far  as  I  am  aware  has  previously  taken,  is  cer- 
tainly a  legitimate  one,  even  if  it  be  not  granted 
me  that  it  is  the  only  proper  one ;  and  if  our 
vision  from  it  be  really  distorted,  to  what  the 
distortion  is  due  remains  to  be  shown. 

There  is  usually  a  kernel  of  truth,  overlooked 
by  scholars,  in  any  popular  conception  or  mis- 
conception, which  persists  in  spite  of  disproof. 
The  unconscious  cerebration  of  mankind  is 
rarely  wholly  in  the  wrong  in  its  final  results, 
however  inadequate  and  inconclusive  the  argu- 
ments popularly  advanced  in  support  of  its 
conclusions  may  be.  When  therefore  a  scien- 
tific theory,  especially  one  developed  with  no 
ulterior  purpose  in  view,  furnishes  a  corollary 
which  supports  a  popular  opinion,  hitherto 
controverted  by  scholars,  the  theory  should 
not  be  condemned  on  that  account.  On  the  con- 
trary, that  it  endorses  the  popular  conception 
and  explains  its  persistence  under  adverse 
criticism,  should  create  some  presumption  in  its 
favour. 

In  closing  this  chapter  I  wish  to  call  attention 
to  the  circumstance  that  the  conception  of  the 
productive  process  advanced  is  not  subject  to 
the  criticism  rightly  applicable  to  a  good  many 
economic  theories  advanced  in  the  past,  that  in 


340     Enterprise  and  Production 

studying  the  economic  process  from  the  point 
of  view  of  the  individual  participant  we  lose 
sight  of  the  wider  relations  between  that  pro- 
cess and  the  community  at  large.  These  wider 
relations  are  usually  spoken  of  as  **  Social  Eco- 
nomics" or*'National  Economics."  We  now  see, 
to  be  sure,  that  neither  of  these  terms  is  very 
exact.  Granting  the  distinction  we  have  drawn 
between  social  and  economic  effort,  the  two 
terms  are  hardly  susceptible  of  being  conjoined 
in  the  sense  in  which  the  term  *'  Social  Eco- 
nomics "  is  usually  employed.  Neither  can  we 
correctly  use  the  term  **  National  Economics" 
except  as  confined  to  covering  the  total  creation 
of  purchasing  power  within  a  nation,  and  this 
excludes  a  good  many  elements  of  the  national 
weal.  Nevertheless  there  do  exist  relations, 
and  very  important  relations,  between  the  total 
accomplished  by  the  economic  activities  of  indi- 
viduals, and  the  welfare  of  the  community  as  a 
whole.  But  it  must  never  be  assumed  that  the 
economic  success  of  individuals,  or  even  their 
average  economic  success,  coincides  with  the 
degree  of  welfare  the  community  enjoys.  This 
unwarrantable  assumption  was  made  by  the 
Physiocrats  and  Mercantilists,  and  was  conjoined 
with  the  additional  error  of  assuming  that  eco- 
nomic success  was  only  the  success  of  a  certain 
class  of  producers,  sometimes,  as  suited  their 


The  Productive  Process      341 

argument,  the  receivers  of  profit,  and  sometimes 
the  receivers  of  the  rent  of  land,  and  sometimes 
the  accumulators  of  wealth — as  the  word  "  sur- 
plus "  was  used  by  them  with  each  of  these  con- 
notations. Adam  Smith  shook  himself  free  from 
most  of  these  ambiguities,  but  not  wholly  so,  as 
it  is  evident  from  the  title  of  his  book,  The 
Wealth  of  Nations^  that  he  regarded  its  accumu- 
lations as  the  measure  of  a  nation's  economic 
well-being.  The  underlying  premise  of  the 
dogma  of  laissez-faire  is  the  affirmation  that 
any  good  obtained  by  an  individual  as  the  re- 
sult of  legitimate  economic  effort  is  necessarily 
an  addition  to  the  "  weal "  of  the  community, 
which  is  a  practical  denial  that  individual  eco- 
nomic weal  has  any  relation  to  the  weal  of  the 
community  other  than  being  included  in  it.  The 
present  conception  of  the  productive  process 
goes  a  step  beyond  Adam  Smith  and  a  step 
farther  away  from  the  "  Pre-Adamite  "  concep- 
tion in  recognising  that  the  well-being  of  so- 
ciety, or  of  the  nation,  is  not  the  sum-total 
of  the  economic  well-being  of  the  individuals 
composing  the  society  or  the  nation.  Practi- 
cally viewing  Economics,  however  they  define 
it,  as  the  science  concerned,  not  with  a  special 
class  of  human  activities,  but  with  the  pro- 
ductive aspect  of  all  human  actions.  Eco- 
nomists   are    at    sea    and    really    accomplish 


342     Enterprise  and  Production 

little  when  they  endeavour  to  discover  the 
relations  of  economic  weal  with  individualistic 
and  social  weal,  or  to  the  total  weal  of  the  com- 
munity, which  must  include  all  three.  Indi- 
vidualistic and  social  "  weals  "  are  products,  but 
if  Economics  is  the  science  concerned  with  the 
productive  aspects  of  human  actions,  every  pro- 
duct must  be  an  economic  one,  whether  it  be 
individualistic  or  social  or  industrial.  Of  course 
a  science  could  be  constructed  on  this  basis  and 
dubbed  Economics,  though  that  would  violate 
all  our  preconceptions  of  the  meaning  of  the 
term.  It  would  really  be  the  science  concerned 
with  the  laws  governing  volitions  in  general, 
and  would  tell  us  nothing  at  all  of  the  influences 
special  to  each  method  of  production — which  is 
the  knowledge  we  are  mainly  concerned  with, 
to  enable  us  to  apply  our  knowledge  to  the  or- 
dinary and  practical  affairs  of  life  and  to  en- 
able us  to  understand  the  mutual  relations  of 
individualistic,  social,  and  industrial  conditions. 
Economists  have  been  trying  to  ride  two 
horses  at  once,  and,  while  their  definitions  have 
been  prancing  in  one  direction,  their  practical 
conception  and  treatment  of  their  subject  has 
proceeded  in  another.  While  their  formal  defi- 
nitions are  largely  founded  upon  the  idea  of 
the  science  as  concerned  with  productivity  in 
general,  their  treatment  of  the  subject  is,  in  the 


The  Productive  Process       343 

main  at  least,  confined  to  a  consideration  of  in- 
dustrial production.  Of  course  I  do  not  mean 
to  assert  that  economists  have  been  wholly 
oblivious  of  the  various  distinctions  here  advo- 
cated. They  have  been  in  the  air  and  have 
greatly  influenced  their  treatment  of  the  subject, 
but  they  have  never  been  discerned  clearly, 
much  less  accurately  formulated,  and  in  some 
instances  have  been  formally  denied  at  the 
same  time  that  they  were  unconsciously  utilised. 
Now  the  conception  of  the  productive  pro- 
cess here  advocated,  while  it  recognises  much 
more  fully  than  the  present  one  the  one  point 
of  truth  in  the  *'  Pre-Adamite  "  conception, 
namely,  that  the  entrepreneur  or  enterpriser 
occupies  a  unique  position  in  industry  which 
puts  him  in  a  different  class  from  the  other 
productive  factors,  making  him  dominant  in 
the  sense  that  the  conduct  and  direction  of 
industry  is  confided  to  him,  really  progresses 
one  step  farther  away  from  the  *  Pre-Adamite  ' 
conception  than  the  Adamite  or  Post-Adamite 
conceptions,  which  regard  the  "  surplus  "  simply 
as  a  part  of  the  total  weal  of  the  community, 
by  disclosing  and  emphasising  the  fact  that  the 
smaller  the  relatively  necessary  "  surplus  "  the 
greater  the  total  economic  weal  (and,  by  infer- 
ence, the  social  and  individualistic  weal  also)  of 
the   community  will  be.     Disclosing,   for  the 


344     Enterprise  and  Production 

first  time,  that  accumulation  finds  its  limit  in 
the  uses  to  which  the  entrepreneur  is  willing  to 
put  it,  and  that  the  response  of  the  subsidiary- 
factors  to  the  demand  of  enterprise  is  not 
equally  quick,  it  shows  us  that,  while  the  prime 
essential  of  industrial  prosperity  is  that  enter- 
prisers obtain  a  satisfactory  profit,  the  less  the 
enterpriser  and  accumulator  can  be  induced  to 
content  themselves  with,  the  wider  the  field  for 
investment  will  be,  which  must  result  in  a  fuller 
employment  of  labour,  a  greater  accumulation  of 
capital,  a  larger  availment  of  opportunities,  and 
a  widening  of  enterprise,  eventuating  of  course 
in  a  greater  total  of  product,  and  a  greater 
total  of  weal  for  the  community,  provided 
individualistic  and  social  weals  have  not  been 
sacrificed  for  the  economic  to  too  great  an  ex- 
tent. So  far,  therefore,  is  enterprise  from 
being  dominant  in  the  Pre-Adamite  sense  of 
being  the  final  object  of  social  regulation  and 
the  measure  of  prosperity,  that  the  truth  lies 
the  other  way,  so  far  as  its  permanent  relation 
to  the  other  factors  is  concerned.  In  the  tem- 
porary and  fluctuating  relations  it  is  indeed 
dominant,  in  that  the  direction  of  the  course 
industry  shall  take  is  intrusted  to  it,  so  that  it 
insists  on,  and  succeeds  in,  obtaining  the  normal 
rate  of  profit,  taking  one  year  with  another,  but 
it  is  itself  dominated  by  the  consumers — that  is 


The  Productive  Process       345 

by  the  community  as  a  whole — which  is  amply 
protected  against  the  normal  rates  of  profit  and 
interest  being  exceeded  on  the  average  by  the 
marginal  enterpriser,  and  the  marginal  capital- 
ist, by  the  competition  of  enterprisers  with 
enterprisers,  and  of  accumulators  with  accu- 
mulators. Society  is  not  similarly  or  equally 
protected  against  the  owners  of  opportunities, 
although  the  encroachments  of  monopoly  do 
release  certain  re-adjusting  forces  which  at  least 
limit  them,  even  in  the  case  of  a  purely  artificial 
monopoly. 

Our  conception  of  the  productive  process 
emphasises,  much  more  than  the  prevailing 
conception,  the  fact  that  economic  procedure 
is  only  one  of  three  possible  methods  of  attain- 
ing desired  ends,  and  that  the  total  weal  en- 
joyed by  society  must  not  only  include 
weals  acquired  in  all  three  of  the  possible 
methods,  but  also  depends  upon  human  efforts 
being  divided  among  these  possible  methods  in 
such  proportion  as  will  result  in  the  greatest 
combined  aggregate  of  the  three  kinds  of  weal, 
and  thus  affords  us  a  solid  foundation  on 
which  a  true  theory  of  state  interference  with 
individual  initiative  can  be  erected. 

The  subject  is  too  broad  and  intricate  for 
further  discussion  in  this  treatise,  but  surely  the 
conception  of  the  productive  process  we  have 


34^     Enterprise  and  Production 

arrived  at  affords  for  the  first  time  a  secure 
basis  for  deductions  concerning  the  relations 
of  the  three  methods  of  human  activity  and  for 
determining  the  principles  governing  the  moral 
right  of  the  state  to  stimulate,  regulate,  or  pro- 
hibit the  different  forms  and  degrees  of  in- 
dividualistic and  economic  production,  and  for 
informing  us  in  what  instances,  and  to  what  de- 
gree, the  substitution  of  social  for  individualistic 
or  economic  methods  is  advisable. 

Any  conception  which  is  not  an  evolution 
from  previous  conceptions  should  be  distrusted. 
I  have  been  at  pains  therefore  to  point  out,  both 
elsewhere  and  in  what  has  just  been  said,  that 
our  conception  of  the  productive  process,  al- 
though it  differs  quite  radically  from  previous 
conceptions,  is  by  no  means  revolutionary,  and 
that  it  differs  from  them  only  in  points  where 
amendment  is  necessitated  by  the  resolution  of 
confessedly  unsolved  problems. 

Lastly,  I  cannot  but  flatter  myself  that  the 
definition  of  the  science  and  the  concepts  of 
the  three  fundamental  terms  I  have  ventured 
to  propose  can  be  made  distinct  and  in- 
telligible to  the  man  of  ordinary  culture  who 
will  not  bother  himself  with  the  present  techni- 
calities of  economists.  Can  we  not  indulge  the 
hope  that,  when  this  is  once  accomplished, 
economic  laws  and  tendencies  will  become  so 


The  Productive  Process       347 

comprehensible  to  him  that  he  will  apply  them 
to  the  economic  and  social  questions  he  is  now 
so  interested  in?  Will  not  economic  science 
speak  with  an  authority  it  does  not  now  pos- 
sess, and  with  a  clearness  and  strength  that  will 
enable  its  voice  to  be  heard  even  above  the  din 
of  popular  discussion.  He  is  certainly  a  man 
of  very  mediocre  intelligence  who  cannot  be 
made  to  understand  that  Economics  is  con- 
cerned with  the  clearly  separable  group  of 
human  actions,  due  to  the  combination  of  in- 
dividuals for  predetermined  personal  purposes ; 
and  that  when  so  combined  the  purchasing 
power  created  is  divided  among  the  combin- 
ing individuals  in  accordance  with  the  func- 
tions they  perform :  wages  to  those  who  change 
the  form  or  place  of  matter,  or  who  arrange 
ideas ;  interest  to  those  who  by  refusing  to  ex- 
pend purchasing  power  enable  others  to  retain 
possession  of  products  while  they  are  being 
fashioned,  or  held  for  the  convenience  of  the 
consumer,  or  while  they  are  in  use  as  facilities 
of  production;  rent  to  those  who  possess  or 
furnish  to  others  advantages  by  means  of  which 
the  cost  of  production  is  lessened ;  and  lastly 
profit  to  the  one  who,  employing  labor,  capital, 
and  opportunity  as  means,  does  not  furnish  a 
means  himself  but  subjects  himself  to  the  con- 
ditions of  the  undertaking — all   its   risks,  un- 


34^    Enterprise  and  Production 

certainties,  and  responsibilities.  This  concep- 
tion of  the  productive  process  is  certainly  plain 
and  intelligible, 'comprehendible  by  everybody, 
and  when  once  comprehended  it  dissipates 
most  of  the  ambiguities  which  now  obscure 
the  popular  discussion  of  economic  principles. 
Our  conceptions  of  the  productive  factors 
and  their  functions  once  diffused  it  will  be 
no  longer  possible  for  any  one  to  believe 
that  **  labour  produces  all  things.'*  Such  an  as- 
sertion becomes  ridiculous  when  it  is  recognised 
that  labour  produces  in  exactly  the  same  sense 
that  land  and  capital  can  be  said  to  do — that  is, 
as  a  means  only.  The  fact  that  labour  is  an  in- 
telligent active  cause,  whereas  land  and  capital 
are  inert  or  acted  upon,  makes  no  difference  so 
long  as  the  labourer's  intelligeilce  is  subservient 
to  the  one  who  employs  him.  His  acceptance 
of  a  wage  from  another,  necessarily,  and  in 
itself,  assigns  to  that  other  all  claim  on  the 
product  itself.  The  production  of  anything 
connotes  the  purpose  the  product  is  expected  to 
serve.  Such  purpose  is  necessarily  that  of  the 
employer  and  not  of  the  employee.  Conse- 
quently it  is  the  employer  only  who  really  pro- 
duces. Labourers,  therefore,  have  no  "  natural 
right  **  to  anything  more  than  the  employer 
is  forced  to  pay  by  the  industrial  conditions 
obtaining  at  the  time,  any  more  than  capital- 


Tlte  Productive  Process      349 

ists  can  exact  more  interest  or  landlords  more 
rent  in  the  long  run  than  these  same  employ- 
ers can  afford  to  pay  them. 

Again  when  the  distinction  between  in- 
dividualistic, economic,  and  social  actions  is 
clearly  apprehended,  the  spectre  of  socialism, 
though  it  may  not  disappear,  is  robbed  of  its 
terrors.  Once  it  is  recognised  that  there  are 
only  three  ways  of  obtaining  desired  ends — 
many  of  which  ends  can  be  obtained  in  two  or 
three  of  the  possible  ways — it  becomes  a  mere 
matter  of  expediency  which  way  is  selected. 
Each  kind  of  endeavour  has  its  sphere  in  which 
it  is  the  most  effective  for  human  weal,  and  al- 
though these  spheres  cannot  be  accurately  de- 
termined so  that  there  is  no  doubtful  border- 
land to  each,  it  is  only  when  manifestly  in  this 
borderland  that  a  proposed  change  in  the 
method  of  attainment  permits  of  discussion. 

The  authoritative  and  unequivocable  concep- 
tions of  economic  fundamentals  I  have  been 
labouring  to  establish,  easily  comprehensible  as 
they  are,  must  finally  convince  labour  leaders 
of  the  absurdity  of  their  present  efforts  to  force 
the  employers  to  content  themselves  with  a 
smaller  share  of  the  product  by  increasing  the 
risks  and  responsibilities  which  the  exercise  of 
their  function  forces  them  to  assume.  At  the 
same  time  they  point  to  the  proper  points  oi 


350    Enterprise  and  Produttion 

attack  and  the  means  by  which  the  labourer's 
share  of  the  product  can  really  be  increased. 
First:  by  decreasing  the  risks  of  business. 
Second :  by  encouraging  the  appropriation 
of  neglected  and  undiscovered  opportuni- 
ties. Third  :  by  improving  the  environment 
of  labourers,  and  so  increasing  their  health, 
strength,  and  longevity.  Fourth :  by  edu- 
cation, training,  and  anything  else  that  in- 
creases the  efficiency  of  labourers.  Fifth  :  by 
restrictions  on  privilege,  so  far  as  that  can  be 
accomplished  without  interfering  with  the  con- 
tinued search  for  and  appropriation  of  addi- 
tional opportunities — so  far,  that  is,  as  it  does 
not  discourage  business  men  from  entering 
upon  new  enterprises  or  expanding  old  ones. 
Sixth :  by  insisting  that  public  indebtedness 
shall  not  be  increased  for  unproductive  pur- 
poses, except  of  course  when  the  exigency  is 
imperative.  Seventhly,  and  lastly :  by  the  as- 
sumption by  the  state  of  such  enterprises  as, 
all  things  considered,  can  manifestly  be  better 
conducted  socially. 

Whenever  the  common  consciousness  of  that 
more  intelligent  portion  of  the  community, 
which  under  any  regime  will  control  and  direct 
social  customs  and  state  action,  can  be  brought 
to  understand  and  accept  these  fundamental 
conceptions,  we  should  be  able  to  rely  upon  an 


The  Productive  Process      351 

intelligent  and  beneficial  direction  of  economic 
and  social  evolution  on  the  whole,  for  though 
mistakes  will  of  course  be  made,  why  they  are 
mistakes  will  shortly  become  self-evident. 

On  the  other  hand  so  long  as  the  present 
ambiguous  conceptions  of  the  productive  fac- 
tors and  functions  remain  prevalent,  and  so 
long  as  no  distinct  lines  of  cleavage  between 
individualistic,  social,  and  economic  actions  are 
recognised,  economic  and  social  development 
cannot  be  very  intelligently  directed.  And 
when  mistakes  are  made,  as  they  inevitably 
will  be  in  great  numbers,  the  means  of  dis- 
covering why  they  are  mistakes  and  whether 
they  should  be  entirely  recalled  or  only  modi- 
fied will  be  lacking,  just  so  long  as  our  teachers 
are  unable  to  explain  to  us  the  precise  content 
and  the  unequivocal  and  indisputable  meaning 
of  the  fundamental  terms  they  employ. 


CHAPTER  XI 

TRADE-UNIONS  AND   STRIKES 

THE  term  "  wages  "  is  properly  used  in  four 
significations,  but  I  fail  to  remember  any 
discussion  of  the  labour  question  in  which  these 
four  senses  are  carefully  discriminated.  Indeed 
only  the  terms  *'  money  wages  '*  and  "  real 
wages  "  commonly  come  to  the  front,  and  the 
latter  term  is  always,  or  nearly  always,  used 
with  what  seems  to  me  an  erroneous  content. 

We  have  first  "money  wages,*'  or  the  la- 
bourer's daily  reward  computed  in  currency  ; 
second  "proportional  wages,"  or  wages  com- 
puted in  the  percentage  that  accrues  to 
labourers  of  the  value  added  to  the  product ; 
third,  the  amount  of  consumable  commodities 
that  the  money  wages  received  by  a  fully  em- 
ployed labourer  will  procure.  This  is  usually, 
but  erroneously,  spoken  of  as  the  "  rate  of  real 
wages,"  but  which,  for  lack  of  a  better  term, 
I  propose  to  speak  of  here  as  "  commodity 
wages."  Last,  we  have  what  are  truly  "  real 
wages,"  those  measured  by  the  consumable 
352 


Trade-Unions  and  Strikes    353 

commodities  which  the  average  money  wages 
of  labourers,  taking  the  employed  and  the  un- 
employed together,  can  command.  In  other 
words,  I  shall  consider  "real  wages"  as  the 
average  of  wages,  measured  in  commodities 
obtained  by  the  class  as  a  whole,  and  not  as 
the  average  obtained  by  those  of  the  class  who 
are  fortunate  enough  to  be  employed. 

This  distinction  becomes  of  great  importance 
because  of  the  comparative  inelasticity  of  labour 
force,  to  which  we  have  already  called  atten- 
tion. Sudden  changes  in  the  number  of  avail- 
able labourers  do  not  occur.  While  enterprise, 
opportunity,  and  capital  adjust  themselves  to 
the  fluctuating  conditions  of  business  by 
changes  in  their  amounts,  increasing  or  decreas- 
ing in  comparatively  quick  response  to  an  in- 
crease or  decrease  in  the  demand,  there  are 
practically  just  as  many  available  labourers 
competing  for  employment  when  business  is 
dull  as  when  it  is  active.  So  far  as  the  supply 
of  labourers  is  affected  by  the  demand  for 
labour,  it  is  only  by  the  average  of  such  demand 
over  a  long  period  of  time,  during  which  several 
alternations  of  industrial  depression  and  pro- 
sperity may  occur. 

According  to  the  present  way  of  regarding 
this  matter,  the  necessary  adjustment  by  which 
the  inelastic  labour  force  fits  itself  to  changing 


354    Enterprise  and  Production 

conditions  is  afforded  by  variations  in  the  rate 
of  proportional  or  commodity  wages,  which 
should  therefore  fluctuate  more  violently  than 
the  forms  of  income  accruing  to  the  other  three 
more  elastic  productive  factors,  an  increase  in 
the  demand  for  which  is  partly  at  least  met  by 
an  increase  in  the  supply.  But  even  a  super- 
ficial view  of  the  matter  hardly  seems  to  lend 
confirmation  to  this  view,  in  the  observed  fact 
that,  though  money  wages  do  decline  in  hard 
times  and  advance  in  good  times,  they  do  not 
fluctuate  as  much  as  general  market  prices. 
Labour  is  often  spoken  of  as  a  commodity. 
But  if  the  term  be  permissible  at  all,  it  is  a 
commodity  of  inelastic  supply,  and  differs  from 
all  other  commodities  of  inelastic  supply  in  this 
very  important  particular.  A  rise  in  the  money 
price  of  any  article  of  the  latter  is  accompanied 
by  an  increase  in  the  purchasing  power  of  each 
of  its  units,  whereas  a  rise  in  the  money  price 
of  labour  is  not  coincident  with  any  increase  in 
the  general  purchasing  power  of  each  unit  of 
labour,  because  the  purchasing  power  of  all 
commodities  for  which  money  received  as  wages 
is  expended  depends  so  largely  upon  their 
money  cost  of  reproduction,  which  is  necessarily 
increased  in  just  the  same  proportion  as  the 
general  rate  of  money  wages  is  advanced. 
Further  analysis  of  the  situation  also  discloses 


Trade-Unions  and  Strikes     355 

a  number  of  anomalies.  A  general  rise  in 
**  money  wages"  can  occur  only  after  a  rise  in  the 
average  price  of  commodities,  which  has  accrued 
as  an  extra  profit  to  the  enterprisers,  they  being 
the  owners  of  all  salable  goods.  This,  of 
course,  means  that  the  rise  in  **  money  wages  " 
has  bften  preceded  by  a  decline  in  "  propor- 
tional wages  *'  and  also  in  "  commodity  wages." 
Indeed,  the  enhanced  cost  of  living  is  usually 
the  ground  for  any  successful  claim  for  an  in- 
crease in  "money  wages."  Of  course  the 
immediate  effect  of  an  increase  gained  in 
"  money  wages  "  is  to  raise  both  "  proportional  '* 
and  "  commodity  "  wages,  until  the  gain  is  lost 
by  the  inevitable  rise  in  general  prices.  While 
general  prices  continue  rising,  the  advance  in 
**  money  wages  "  can  never  bring  "  proportional " 
and  "commodity"  wages  much  if  any  above  the 
point  at  which  they  stood  when  the  market  for 
commodities  first  commenced  to  rise,  and  that 
only  temporarily.  If  the  labourers  use  their  ad- 
ditional "money  wages"  for  the  purchase  of 
consumable  goods — as  they  surely  will,  for  by 
our  supposition  their  "  commodity  wages  "  are 
still  somewhat  less,  or  at  least  no  more,  than 
they  were  before  the  general  market  first  com- 
menced to  rise, — the  increase  in  the  extra 
money  demand  for  consumable  commodities  will 
cause  another  rise  in  general  prices,  so  that  very 


35^    Enterprise  and  Production 

shortly  "  commodity  wages  '*  will  be  no  greater 
than  they  were  just  before  *'  money  wages  "  were 
advanced.  And  so,  ad  infinitum^  so  long  as 
the  demand  for  consumable  commodities  is  not 
decreased  by  some  class  of  the  community 
lessening  their  demand  for  them  by  saving 
more  capital  than  can  be  invested  witht)ut  de- 
pressing profits  and  interest.  This  circumstance, 
which  marks  the  culmination  of  the  rise  in 
general  prices,  by  causing  "  capital  goods  "  to 
accumulate,  will  prevent  a  further  advance  in 
the  prices  of  consumable  commodities,  and 
interfere  with  the  tendency  of  the  purchasing 
power  of  money  to  decline  as  money  wages, 
advance  or  remain  stationary.  But  it  will  also 
though  somewhat  later,  check  the  further  ad- 
vance of  money  wages,  and  even  cause  them 
to  decline  as  the  accumulation  of  uninvestible 
capital  continues,  and,  because  it  lags  behind 
them,  the  decline  in  money  wages  will  be  ac- 
companied by  a  corresponding  rise  in  both 
proportional  wages  and  commodity  wages. 
The  intensity  of  the  demand  for  any  com- 
modity is  dependent  upon  its  relative  scarcity, 
while  the  intensity  of  the  demand  for  labour 
depends  upon  its  relative  scarcity  only  so  far 
as  its  money  price  is  concerned,  and  as  it  is 
only  when  the  purchasing  power  of  money  is 
reduced,  that  is  when  prices  are  high  and  profits 


Trade-Unions  and  Strikes    357 

great,  that  the  demand  for  additional  labour 
force  arises,  it  follows  that  instead  of  the  in- 
elasticity in  the  supply  of  labour  force  being 
adjusted,  as  is  the  more  temporary  inelasticity 
in  the  supply  of  any  single  commodity,  by  an 
increase  in  the  purchasing  power  of  each  unit, 
corresponding  to  the  increase  in  its  money 
price,  the  purchasing  power  of  a  unit  of  labour 
does  not  correspond  to  the  increase  in  its 
money  price.  As  a  matter  of  fact  so  far  are 
they  from  corresponding  that  an  inverse  ratio 
obtains  between  them,  except  during  the  short 
period  marking  the  culmination  of  a  rise  in 
general  prices,  when  for  a  short  time  both 
money  and  commodity  wages  may  remain  sta- 
tionary, to  be  followed  by  a  longer  period 
during  which  commodity  wages  increase  while 
money  wages  remain  stationary  or  decrease. 
Up  to  that  time  an  increase  of  money  wages  is 
not  accompanied  by  a  corresponding  increase 
in  commodity  wages  ;  after  it  the  latter  increase 
despite  any  decrease  in  the  former. 

Nor  is  the  see-saw  between  money  wages  on 
the  one  hand  and  proportional  and  commodity 
wages  on  the  other  at  all  affected  by  the 
employment  of  idle  labour,  so  long  as  no  ad- 
ditional accumulation  of  capital  is  made  beyond 
the  amount  required  to  furnish  tools,  and  to 
carry  goods  in  process  and  in   stock  for  the 


35^    Enterprise  and  Production 

additional  labour  force,  as  in  such  cases  the 
additional  supply  of  consumable  commodities 
affords  an  exactly  equivalent  demand  for  them. 
Therefore  the  rate  of  profit  and  general  prices 
will  be  unaffected  by  this  circumstance,  as  well 
as  money,  proportional,  and  commodity  wages, 
except  of  course  to  the  extent  in  which  the 
proportion  of  the  total  product  accruing  to 
opportunity  and  capital  happens  to  vary.  How 
the  proportions  going  to  rents  and  interest  are 
affected  by  rising  and  falling  prices  of  com- 
modities, and  by  the  increased  production 
above  referred  to,  is  an  interesting  but  very 
complex  subject  which  we  cannot  enter  upon 
at  this  point  (as  such  fluctuations  do  not  affect 
the  validity  of  the  theory  here  advanced,  but 
only  modify  its  practical  application),  further 
than  to  say  that  what  influence  they  have  ex- 
pends itself  directly  upon  profits,  and  only 
indirectly  affects  wages  to  the  extent  in  which 
the  increase  or  decrease  of  profit  influences  the 
employment  of  labour  and  general  market 
prices. 

Coming  now  to  the  consideration  of  "real 
wages,"  that  is  the  total  amount  expended  in 
wages,  the  purchasing  power  received  by  the 
labouring  class  as  a  whole,  we  are  enabled  to 
see  that  a  general  rise  in  the  price  of  consumable 
commodities,  greater  than  the  coincident  rise 


Trade-Unions  and  Strikes    359 

in  money  wages,  operates  in  two  opposite  direc- 
tions ;  it  decreases  the  relative  purchasing  power 
of  a  day's  wages,  as  that  is  connoted  by  a  rise 
in  the  rate  of  profit  surely  attendant  upon  a 
rise  in  the  market,  but  increases  the  number  of 
days*  wages  received,  as  more  labourers  are 
employed  when  profits  are  large.  There  is  no 
question  about  the  latter  being  the  more  im- 
portant influence,  so  that  we  are  able  to  make 
the  somewhat  paradoxical  statement,  that  the 
labouring  classes  as  a  whole  are  never  so  well 
off  as  when  the  individual  labourer,  who  has  had 
steady  employment  during  the  cycle  of  bad  and 
good  times,  finds  himself  the  worst  off  in  that 
the  purchasing  power  of  his  wages  is  the  least ; 
or  in  other  words  "  real  wages  "  are  the  greatest 
when  "commodity,"  usually  spoken  of  as  ''real," 
wages  are  the  least.  Taken  together,  employed 
and  unemployed,  the  labouring  classes  are  better 
off  when  enjoying  a  smaller  proportion  of  a 
greater  product,  than  when  they  obtain  a  larger 
proportion  of  a  smaller  product.  A  general  rise 
of  money  wages  is  unobtainable  except  at  the  ex- 
pense of  a  more  than  corresponding  loss  in  the 
purchasing  power  of  the  total  money  received  in 
wages,  as  soon  as  the  market  has  adjusted  itself  to 
the  new  scale  of  wages,  or  at  the  expense  of  the 
amount  of  employment  being  lessened,  if  the 
market  has  culminated  and  does  not  adjust  itself. 


360    Enterprise  and  Production 

What  labourers  gain  from  a  general  advance  in 
market  prices  as  compared  with  the  rate  of 
money  wages,  is  additional  employment  at  the 
expense  of  a  loss  in  the  total  purchasing  power 
of  a  day's  wages,  however  much  money  wages 
have  been  advanced.  And  if,  as  sometimes 
happens,  money  wages  are  advanced  when 
market  prices  have  culminated,  labourers  as  a 
class  are  eventually  injured,  as  they  lose  more 
from  lack  of  employment  than  they  gain 
through  the  increase  in  the  purchasing  power 
of  a  day's  wages. 

Under  the  most  favourable  circumstances, 
therefore,  the  attempt  of  trade-unions  to  bene- 
fit the  labouring  classes  as  a  whole  by  forcing 
their  employers  to  raise  the  money  wages  of 
either  one  class  of  workers,  or  of  all  classes  of 
workers  together,  is  as  vain  as  the  endeavour 
to  soar  heavenward  by  pulling  on  the  straps  of 
one's  boots.  Any  group  may  succeed  in  bene- 
fiting themselves,  and  becoming  as  it  were  an 
aristocracy  of  labour,  but  it  is  wholly  at  the  ex- 
pense of  the  other  groups  of  labourers,  and  any 
benefit  the  other  groups  obtain  will  be  partly  at 
their  expense.  Labourers  are  wrong  therefore 
when  they  look  upon  the  contest  as  one  against 
capital,  by  which  they  really  mean  against  their 
employers,  the  enterprisers,  whereas  it  is  really 
only  an  attempt  to  obtain  a  larger  share  of  the 


Trade-Unions  and  Strikes    361 

wages  fund.  It  is  indeed  a  fight  against  the  in- 
dividual enterpriser,  who,  even  when  he  can 
raise  the  price  of  his  product  correspondingly, 
eventually  sustains  a  very  real  injury  from  the 
restriction  of  demand  for  the  commodity  he 
produces,  due  to  the  rise  in  price  necessitated 
by  his  being  forced  to  pay  higher  wages.  But 
this  demand  of  which  he  is  deprived  is  only 
transferred  to  commodities  produced  by  other 
enterprisers,  so  that  the  class  as  a  whole  is  not 
injured  beyond  what  all  classes  suffer  with  them 
from  industrial  stagnation.  Competition  can- 
not arise  between  buyer  and  seller.  It  exists 
only  between  those  who  bring  like  goods  to 
market,  or  who  seek  like  goods  in  the  market. 
The  contest  between  buyer  and  seller  is  purely 
individualistic,  and  any  advantage  obtained  by 
either  does  not  eventually  accrue  to  the  indus- 
trial class  of  which  he  happens  to  be  a  member. 
In  this  analysis  of  the  labour  question,  I  have 
so  far  disregarded  the  circumstances  which  are 
generally  considered  as  modifying  similar  con- 
clusions. It  is  usually  assumed  as  a  self-evident 
proposition,  that,  when  wages  are  advanced  in 
an  enterprise  whose  product  is  wholly  or  mainly 
consumed  by  the  rich,  a  substantial  addition  is 
made  to  the  aggregate  of  wages  wholly  at  the 
expense  of  the  purchasing  power  of  profits,  in- 
terests, and  rents.    There  are  however  grounds 


362    Enterprise  and  Production 

for  doubting  the  complete  validity  of  this  the- 
ory. It  will  readily  be  appreciated  that,  if  it 
were  known  at  the  time  of  their  creation  just 
what  products  would  be  consumed  by  the  rich, 
so  that  labour  could  exact  higher  wages  for 
helping  to  produce  everything  that  the  rich 
consumed,  perhaps  none,  and  at  least  not  all, 
of  the  advantage  would  accrue  to  labourers  as 
a  whole,  as  interest  and  profit  would  be  corre- 
spondingly raised.  The  inducement  to  save 
and  the  inducement  to  hazard  are  personal,  and 
would  be  correspondingly  lessened  by  any  loss 
in  the  relative  purchasing  power  of  interest  and 
profits.  As  to  rentals  the  case  is  different,  as 
the  cost  of  opportunity  is  usually  so  much  less 
than  its  value  that  rentals  would  be  increased 
only  (if  at  all)  in  the  proportion  of  the  increased 
cost  of  reproducing  opportunities.  It  must 
further  be  taken  into  account  that  if  the  prices 
of  such  things  as  automobiles,  expensive  fur- 
nishings, and  works  of  art  are  raised  by  higher 
wages  being  exacted  for  producing  them,  some 
transfer  of  demand  on  the  part  of  the  rich  will 
naturally  occur,  to  the  manifest  disadvantage 
of  labour,  as  such  articles  are  usually  produced 
by  skilled  labour,  and  as  a  consequence  the 
ranks  of  labour  will  contain  fewer  highly  paid 
skilled  workmen. 

Secondly,  I  have  assumed  the  loss  of  the 


Trade-Unions  and  Strikes     3^3 

labouring  classes  as  consumers  to  be  equal  to 
any  gain  in  money  wages  obtained.  This  is 
not  exactly  correct,  as  whether  it  is  more  or 
less  depends  upon  what  proportion  of  aggre- 
gate wages  is  expended  for  consumable  articles 
and  what  saved  and  transformed  into  capital, 
as  compared  with  the  proportion  which  the 
expeditures  of  the  other  classes  bear  to  their 
accumulations.  As  a  matter  of  fact  it  is  some- 
what greater,  so  that  the  labourers'  loss  as 
consumers  is  greater  than  their  gain  from  an 
advance  in  money  wages.  Assuming  that  the 
articles  whose  prices  are  raised  enter  in  equal 
proportion  into  the  consumption  of  the  rich 
and  the  poor,  and  that  the  excess  of  savings 
over  the  intrenchment  upon  previous  savings, 
taking  one  year  with  another,  is  entirely  con- 
tributed by  the  rich,  and  that  the  total  product 
is  divided  6^%  to  wages  and  35^  to  other  forms 
of  income,  and  that  $%  of  the  product  is  saved 
annually,  the  aggregate  consumption  by  labour- 
ers of  the  commodities  whose  price  has  been 
raised  by  the  same  percentage  as  the  increase 
in  wages  would  be  in  the  ratio  of  65  to  30,  so 
that  the  class  as  a  whole  would  lose  more  as 
consumers  than  the  special  workers  engaged 
upon  the  product  in  question  would  gain  from 
the  increase  in  their  money  wages.  The  aver- 
age is  re-adjusted  however  during  the  declining 


3^4    Enterprise  and  Production 

period  of  industry,  during  which  the  labourers 
gain  as  consumers  slightly  more  than  they  lose 
in  the  rate  of  money  wages.  It  is  of  course  to 
be  remembered  that  the  corresponding  gains 
and  losses  are  not  quite  simultaneous.  At 
first,  when  money  wages  advance,  there  is  a 
gain  in  aggregate  real  wages  supplied  at  the 
expense  of  enterprisers,  who  however  imme- 
diately proceed  to  recoup  themselves  by  raising 
the  price  of  the  product,  not  only  to  cover 
their  extra  expenditure  in  wages  but  also  to 
provide  a  profit  on  their  additional  outgo  for 
wages  and  a  profit  on  the  enhanced  value  of 
capital,  both  fixed  and  circulating — which 
profit  wholly  compensates  them  as  a  class  for 
any  loss  that  falls  upon  them  as  consumers  of 
a  dearer  product.  They  obtain  also  a  further 
compensation,  which,  in  the  long  run  and  on 
the  average,  fully  offsets  their  subsequent  loss 
when  money  wages  and  general  prices  are  de- 
clining, in  the  enhanced  value  of  the  capital 
they  employ — which  value  depends  of  course 
upon  the  cost  of  reproduction.  Enterprisers  do 
indeed  lose  by  the  extent  of  their  undertakings 
being  lessened  when  the  advance  in  prices  cul- 
minates and  the  reverse  process  sets  in,  but 
this,  instead  of  being  a  gain  to  the  labourers,  is 
accompanied  by  a  corresponding  loss  in  the 
amount  of  employment  which  results  in  a  net 


Trade-Unions  and  Strikes    365 

loss  in  all  incomes.  In  other  words  all  classes 
lose  by  the  non-creation  of  the  additional  pro- 
duct when  business  is  bad,  the  only  advantage 
to  labour  being  the  negative  one  that  it  does 
not  suffer  its  full  proportion  of  the  loss. 

Let  us  suppose,  in  illustration,  a  representa- 
tive enterpriser  who  is  paying  his  labour  force 
65^  of  the  value  he  adds  by  his  operations  to 
the  commodity  he  manufactures,  distributing 
the  remaining  35^  in  rent,  interest,  and  his  own 
profit.  A  general  advance  in  prices  occurs,  so 
that  at  the  time  his  hands  ask  for  an  advance 
of  5^,  he  finds  that  he  can  afford  to  give  it  to 
them  because  he  is  selling  his  product  at  an 
advance  of  5^.  At  first  sight  it  would  appear 
that  the  employer  was  still  better  off  than  at 
first  as  y^^  of  $%  is  only  3j^.  But  as  we  are 
supposing  a  general  advance  all  along  the  line 
in  both  prices  and  wages,  it  is  evident  that 
it  will  take  this  i^%  to  pay  for  the  increased 
interest  and  profit  on  capital  now  worth  $% 
more,  and  probably  a  $%  increase  in  his  rentals 
also.  In  other  words,  a  simultaneous  advance 
of  $%  in  both  wages  and  in  general  market 
prices  leaves  all  classes  just  where  they  were 
before,  proportionally,  the  only  difference  being 
that  everything  is  on  a  higher  scale.  It  is  now 
as  easy  to  get  $1.05  as  it  was  to  get  $1.00  be- 
fore but  it  now  takes  $1.05  to  buy  what  was 


366     Enterprise  and  Production 

worth  a  dollar.  While  general  prices  are  ad- 
vancing faster  than  money  wages  there  is  a 
gain  to  the  enterpriser,  which  of  course  is  lost 
again  during  the  period  after  prices  have  cul- 
minated in  which  both  general  prices  and 
money  wages  decline,  as  the  decline  in  general 
prices  always  anticipates  that  in  wages.  In  the 
long  run  this  gain  and  this  loss  must  exactly 
counterbalance,  both  to  the  labourers  and  their 
employers,  leaving  the  proportion  of  the  pro- 
duct that  goes  to  wages  undisturbed  for  the 
whole  cycle,  though  for  a  time  each  party  gains 
at  the  expense  of  the  other.  Some  may  be  in- 
clined to  think  that  if  the  period  during  which 
general  prices  were  advancing  faster  than  wages 
was  shorter  than  the  compensating  period  when 
they  were  declining  more  than  wages,  a  larger 
proportion  of  the  product  would  accrue  to 
wages  and  a  smaller  proportion  to  enterprise. 
If  this  were  true  it  would  be  unfortunate  for 
the  labouring  classes  as  a  whole,  because  it 
would  mean  a  lower  average  of  the  number  of 
labourers  employed,  which  would  cost  them 
more  than  the  gain  in  proportional  wages. 
And  it  might  be  true  if  a  single  cycle  of  activ- 
ity and  depression  alone  was  under  considera- 
tion. Anything  gained  in  one  cycle,  however, 
would  be  lost  in  another,  as  the  general  average 
of  profit  obtained  must  in  the  long  run  tend  at 


Trade-Unions  and  Strikes    3^7 

least  to  equal  the  expectation  of  profit  that 
will  determine  the  enterpriser's  employment  of 
labour,  and  any  temporary  variance  that  occurs 
will  be  as  likely  to  be  on  one  side  as  the  other. 

As  a  matter  of  fact,  in  a  progressive  country 
the  periods  of  industrial  activity  must  be  longer 
than  those  of  depression,  because  each  cycle 
results  in  a  permanent  addition  to  the  total 
capital  fund  which  enterprisers  are  able  to  find 
profitable  employment  for,  and  this  does  affect 
the  proportion  of  the  product  going  to  labour 
in  two  ways.  The  proportion  is  decreased 
by  the  disturbance  in  the  per  capita  amount 
of  capital,  and  increased  by  a  decline  in  the 
normal  rates  of  both  interest  and  profit. 

But  it  by  no  means  follows  that  in  other 
ways  labourers  cannot  lose  by  an  advance  in 
money  wages.  If  the  rise  is  in  an  enterprise 
producing  exportable  commodities,  it  must 
have  some  effect  in  decreasing  exports,  and 
thus  narrowing  the  field  for  investment  for  the 
nation's  capital,  and  bringing  nearer  the  time 
when  enterprisers  must  needs  decrease  pro- 
duction to  protect  themselves,  which  entails  of 
course  some  additional  loss  of  employment. 
And  when  the  price  of  the  article  produced  is 
about  equal  to  the  cost  of  importation,  a  rise  in 
money  wages  will  lead  to  importation  at  the 
expense  of  home  production,  with  a  like  effect 


368     Enterprise  and  Production 

upon  the  field  for  investment  and  employment 
of  home  labour. 

The  great  injury  however  which  labour  agi- 
tators inflict  upon  the  labouring  class  as  a  whole 
is  in  the  enhancement  of  the  normal  rate  of 
profit,  that  is  in  the  expectation  of  profit  that 
will  induce  the  marginal  enterpriser  to  enter 
upon  an  undertaking,  or  to  continue  it  in  full 
operation.  The  division  of  the  product  varies 
somewhat  between  years  of  prosperity,  when 
labour  receives  a  smaller  proportion  of  a  larger 
product  but  a  greater  aggregate  of  wages,  and 
enterprise  a  larger  proportion  of  a  larger  pro- 
duct; and  years  of  depression,  when  labour  re- 
ceives a  larger  proportion  of  a  smaller  product 
but  a  lessened  aggregate  of  wages,  and  enter- 
prise a  smaller  proportion  of  a  smaller  product. 
It  has  been  calculated,  with  probably  an  ap- 
proach to  accuracy,  that  on  the  average,  taking 
one  year  with  another,  labour  receives  about 
65  %  of  the  total  product,  and  rent,  interest,  and 
profit  collectively  the  other  35  %  but  no  at- 
tempt, that  I  am  aware  of,  has  been  made  to  as- 
certain how  this  35  ^  is  divided  among  the  three 
productive  factors.  Taking  rent,  in  the  sense 
here  intended,  as  inclusive  of  all  revenue  from 
opportunity,  and  profits  as  inclusive  of  the  net 
capitalised  value  of  opportunities  appropriated 
and  dissipated  within  the  year,  we  will  not  prob- 


Trade-Unions  and  Strikes    369 

ably  be  far  out  of  the  way  if  we  apportion  12  ^  to 
rent,  3  ^  to  interest,  and  20  %  to  profit.  The  nor- 
mal expectation  of  profit  that  would  insure  the 
continued  employment  of  the  average  amount 
of  labour  engaged  in  industry  will  be  less  than 
this,  let  us  say  1$  %  oi  the  value  added  to  the 
product.  Now  if  employers  could  be  absolutely 
insured,  by  some  such  device  as  the  "  sliding 
scale  "  against  all  labour  troubles  not  only  with 
their  own  employees,  but  also  that  their  market 
would  not  be  disturbed  by  the  labour  troubles 
of  other  employers,  their  normal  expectation  of 
profit  would  be  considerably  reduced.  It  is  not 
perhaps  too  much  to  assume  that  one  quarter  of 
the  risks  of  business  are  due  to  uncertainties  en- 
gendered by  labour  disputes.  If  so,  nearly  7J  % 
would  be  added  to  wages  (65  :  100 ::  5  :  7.69-I-)  if 
this  uncertainty  were  removed,  without  any  det- 
riment to  business  conditions.  If  the  addition 
were  to  money  wages,  the  only  change,  outside 
of  the  fact  that  the  field  for  investment  would 
be  widened,  would  be  that  labourers  would  se- 
cure more  and  enterprisers  less  of  the  total 
product,  but  enterprisers  would  be  as  content 
with  their  share  as  before.  But  if,  as  it  must 
finally  eventuate,  the  gain  came  in  a  fall  in  the 
price  of  consumable  commodities,  as  a  rise,  that 
is,  in  "  commodity  wages,"  it  would  be  just  as 
directly  advantageous  to  the  labourers,  and 
24 


370    Enterprise  and  Production 

would  also  benefit  them  indirectly  to  the  extent 
to  which  it  widened  the  field  for  investment  by 
increasing  exports. 

We  are  now  able  to  discern  the  truth  under- 
lying the  conception  of  a  wages  fund,  obscured 
hitherto  by  the  tacit  assumption  combined  with 
it  that  "capital  employs  labour."  No  part 
or  proportion  of  existing  capital  is  set  apart  to 
be  devoted  to  the  payment  of  wages,  and  no 
wages  fund  exists  in  any  such  sense  as  this.  So 
far  as  there  is  any  relation  between  the  demand 
for  labour  and  the  stock  of  commodities  already 
in  existence,  it  is  exactly  the  opposite  of  what 
the  advocates  of  the  wages  fund  assume.  In 
other  words  it  is  just  when  the  stock  of  "  capi- 
tal goods  "  is  the  greatest  that  the  inducement 
to  hire  labourers  is  the  smallest.  The  '  *  wages 
fund,"  if  the  expression  may  be  allowed,  tends 
to  decrease  as  the  stock  of  "  circulating  capital  " 
increases, and  to  increase  as  "capital"  decreases. 
The  old  theory  of  a  wages  fund  is  correct  in  as- 
suming that  the  amount  that  will  be  expended 
in  wages  in  the  immediate  future  is  a  predeter- 
mined amount,  but  diametrically  wrong  as  to 
how  the  amount  is  predetermined.  In  any 
given  society,  at  any  given  time,  the  conditions 
of  business  are  such  that  a  certain  quantity  of 
labour  can  be  utilised  by  enterprisers  at  the 
going  wages,   and   the   amount  that  will  be 


Trade-Unions  and  Strikes      371 

expended  in  wages  is  a  sum  determined  by  pre- 
vailing industrial  conditions.  A  change  in  these 
conditions  consisting  only  of  an  advance  in 
money  wages  for  part  of  the  labourers,  while  it 
may  diminish,  cannot  permanently  increase  the 
total — measured  not  in  money,  but  in  commodi- 
ties— of  this  predetermined  sum.  Consequently 
any  advance  in  real  wages  obtained  by  a  part  of 
the  labourers  is  eventually  at  the  expense  of  the 
real  wages  of  the  remainder.  If  such  a  gain  to 
labour  were  capable  of  realisation  it  could  come 
about  only  by  decreasing  the  shares  of  the 
other  productive  factors.  But,  as  we  have  seen, 
any  such  decrease,  when  temporarily  effected, 
immediately  sets  in  motion  forces  which  restore 
the  division  of  the  product  to  its  former  and 
normal  ratio.  All  that  is  permanently  affected 
is  the  distribution  of  the  wages  fund  among  the 
labourers.  The  labouring  classes  to-day  are 
probably  paying  fully  as  much  more  for  their 
coal  as  the  increase  in  wages  paid  at  the  mines 
amounts  to. 

The  tendency  of  money  wages  to  advance 
during  a  period  of  rising  prices,  though  some- 
what in  their  rear,  has  of  course  a  temporary 
effect  in  retarding  the  rise  in  profits,  and  thus 
lessening,  or  rather  deferring,  the  inducement 
to  employ  idle  labour.  After  a  very  transient 
period  however  (if  the  addition  to  money  wages 


372     Enterprise  and  Production 

is  not  saved,  as  it  will  not  be,  because,  reckoned 
in  commodities,  wages  are  no  higher  than  be- 
fore the  rise  in  the  market  commenced),  prices 
will  again  advance,  and  the  original  stimulus  to 
employing  idle  labour  will  be  renewed  in  full 
force.  Any  advance  in  money  wages,  during 
a  period  of  rising  prices,  will  correspondingly 
cause  prices  to  advance  further  to  a  point  they 
could  not  otherwise  have  reached.  The  effect 
therefore  of  strikes  and  labour  agitations  in 
general  is  to  greatly  increase  the  range  within 
which  market  prices  fluctuate.  In  other  words 
they  tend  to  prolong  and  intensify  the  period- 
icity of  business  activity  and  depression.  Both 
periods,  those  of  rising  and  those  of  falling 
prices,  are  of  longer  duration,  and  market  prices 
of  commodities  are  alternately  raised  to  a  point 
and  depressed  to  a  point  they  would  not  other- 
wise have  reached.  The  observed  fact  that 
general  prices  and  money  wages  fluctuate  so 
very  much  less  in  countries  where  labour  is  not 
organised  certainly  tends  to  confirm  this  sup- 
position. Possibly  there  is  on  the  whole  some 
advantage  to  the  labouring  classes  in  this  length- 
ening of  the  industrial  cycle,  but  if  so,  it  must 
proceed  from  extraneous  sources,  as  there 
seems  to  be  no  theoretical  reason  why  the 
average  of  proportional  wages  should  be  in- 
creased by  the  longer  swing  of  the  industrial 


Trade-Unions  and  Strikes    zlZ 

pendulum.  The  real  effect  would  seem  to  lie 
in  the  other  direction,  in  that  the  shorter  swing 
of  the  pendulum,  by  lessening  the  severity  of 
business  crises  and  stagnation,  would  remove  a 
risk  which  must  to  some  extent  increase  the 
normal  rate  of  profit. 

But  if  the  efforts  of  the  labouring  classes  to 
increase  the  aggregate  of  their  real  wages  by 
altering  the  distribution  of  the  product  are 
necessarily  futile  in  the  long  run,  a  similar  at- 
tempt on  the  part  of  their  employers  to  depress 
real  wages  is  equally  impossible  of  success,  at 
least  in  permanent  effects.  When  any  class 
of  labourers  are  ground  down  and  forced  to 
accept  wages  that  afford  them  but  a  bare  sub- 
sistence, the  real  gainers  are  not  employers  as 
a  class  (however  much  one  class  of  employers 
may  temporarily  gain  at  the  expense  of  other 
employers),  but  the  consumers  of  the  goods 
they  produce ;  as,  if  prices  and  profits  are  above 
the  normal  in  such  occupation,  competition 
soon  reduces  them.  The  only  way  employers 
could  keep  commodity  or  proportional  wages 
permanently  below  their  normal  level  would 
be  to  restrict  the  accumulation  of  capital  so 
greatly  as  to  keep  the  aggregate  of  capital  per- 
manently below  the  amount  they  could  employ 
profitably.  This  would  increase  the  percentage 
of  the  product  they  could  retain  for  themselves 


374     Enterprise  and  Production 

at  the  expense  of  wages,  but  would  on  the 
other  hand  injure  them  by  lessening  the  aggre- 
gate product  to  be  divided,  because  enterprise 
is  limited  not  only  by  the  available  labour  force 
but  also  by  the  amount  of  capital  capable  of 
profitable  investment,  as  well  as  by  the  rate 
of  profit  that  tempts  to  undertakings.  And  it 
cannot  be  doubted  that  in  the  long  run  and 
within  certain  limits,  enterprisers  and  capitalists 
will  gain  more  from  the  employment  of  a  large 
capital  at  a  reasonable  profit,  than  from  an  ex- 
orbitant profit  obtained  on  a  smaller  capital. 
And  even  if  this  were  not  the  case,  the  individ- 
ual enterpriser  and  accumulator  will  be  gov- 
erned by  the  obtainable  rates  of  profit  and 
interest.  As  we  have  seen,  all  capital  is  in 
actual  possession  of  the  enterprisers  by  what- 
ever class  it  was  originally  saved,  and  enter- 
prisers, whether  they  will  or  no,  must  employ 
it  more  or  less  productively,  the  only  choice 
they  have  being  in  the  special  kind  of  produc- 
tion in  which  it  shall  be  engaged.  The  quantity 
of  the  risks  that  enterprisers  subject  themselves 
to  depends  entirely  upon  the  amount  of  capital 
in  existence,  and  their  only  choice  is  in  the 
quality  of  the  risks  they  will  become  responsi- 
ble for  to  the  capitalists,  who  hold  as  it  were  a 
mortgage  on  capital  to  its  full  value.  The  in- 
terest of  each  enterpriser  as  an  individual  is  to 


Trade-Unions  and  Strikes    375 

obtain  control  of  all  the  capital  he  believes  he 
can  employ  at  a  profit  just  satisfactory  to  him- 
self, or  to  better  advantage.  Especially  is  it 
to  his  advantage  as  an  individual  to  save 
such  capital  as  he  can  employ  himself.  When 
therefore  profits  are  greatest,  not  only  his 
opportunity  but  also  his  inducement  to  save  is 
greatest,  and  may  be  relied  upon  to  insure  a 
rapid  accumulation  of  capital,  even  though  the 
interest  of  other  enterprisers,  and  of  the  class  as 
a  whole,  suffers  thereby.  The  only  way  there- 
fore to  deprive  the  labouring  classes  c.  any 
part  of  their  normal  wages  would  be  for  the 
rich  to  indulge  in  an  expenditure  so  profuse  as 
to  preclude  the  possibility  of  capital  keeping 
up  to  the  requirements  imposed  upon  it  by  the 
increase  of  population  and  the  development  of 
the  arts.  A  relatively  profuse  expenditure  by 
the  rich,  which  nevertheless  allows  of  a  gradual 
accumulation  of  capital  slightly  in  excess  of 
growing  demands  of  population  and  invention, 
will  indeed  lengthen  the  periodicity  of  alter- 
nating prosperity  and  depression ;  but  so  long 
as  the  accumulation  of  capital  periodically 
reaches  an  amount  beyond  what  the  field  for 
profitable  investment  can  absorb,  labourers  as  a 
class  are  assured  of  their  normal  proportion  of 
the  product,  taking  one  period  with  another. 
We  find  here  the  theoretical  justification  of 


37^    Enterprise  and  Production 

the  unconscious  idea  underlying  another  popu- 
lar fallacy  condemned  by  economists ;  namely 
that  the  profuse  expenditure  of  the  rich  affords 
additional  employment  to  labour.  We  see 
that  it  does  do  this  at  least  temporarily  by  de- 
laying the  accumulation  of  capital  which  would 
have  depressed  the  rate  of  profit  sooner,  and  as 
it  is  only  when  profits  are  great  and  the  prices 
of  commodities  high  that  labour  is  most  fully 
employed,  the  effect  of  profuse  expenditure 
accords  with  the  popular  but  discredited  sup- 
position, so  long  at  least  as  it  is  not  so  excessive 
as  to  prevent  some  pressure  of  accumulation 
upon  its  limits. 

We  see,  therefore,  that  the  aggregate  of 
wages  varies  very  nearly  with  the  aggregate 
of  the  product,  increasing  and  decreasing  a 
little  less  than  the  latter  in  the  fluctuations 
about  the  normal  mean,  and  that  the  normal 
percentage  between  them  also  varies  some- 
what according  as  the  uncertainties  of  business 
are  avoided  or  increased.  Undoubtedly  there 
also  occur  variations  in  the  normal. rates  of 
interest  and  rentals,  which,  affecting  first  the 
rate  of  profit,  raising  it  above  or  lowering  it 
below  the  normal,  finally  lead  to  some  further 
variations  in  the  aggregate  of  wages  as  com- 
pared with  the  aggregate  of  products.  We 
have  already  noted  that  the  special  advantages 


Trade-Unions  and  Strikes    m 

conferred  by  opportunity  yield  less  and  less 
rent  as  the  opportunity  becomes  available  to 
an  increasing  number  of  persons,  while  at  the 
same  time,  considered  as  a  facility  for  produc- 
tion, it  becomes  more  and  more  efficacious,  the 
result  of  course  being  that  wages,  interest,  or 
profit,  or  some  combination  of  them,  benefit 
more  in  purchasing  power  than  rent  loses. 
When  the  special  advantage  is  conferred  by 
nature  in  strictly  limited  quantities,  it  cannot 
be  thus  dissipated  among  wages,  interest,  and 
profit,  because  the  special  advantage  cannot 
become  available  to  a  new  set  of  persons,  ex- 
cept by  the  loss  of  the  advantage  by  other  per- 
sons, who  previously  possessed  it.  There  is, 
however,  no  instance,  that  I  know  of,  of  an 
absolutely  limited  natural  advantage.  Not 
only  are  new  lands  constantly  being  brought 
under  cultivation,  and  new  land  created  by  the 
filling  in  of  swamps,  etc.,  but  improved  methods 
are  constantly  affecting  the  expense  of  culture, 
so  that  part  of  the  rent  of  the  land  has  been, 
and  is  being,  distributed  among  the  other 
forms  of  income.  The  only  difference  between 
land  and  other  forms  of  opportunity,  com- 
monly spoken  of  as  "fixed  capital"  or  "capi- 
tal in  use"  and  as  "monopoly  rights,'*  is  in 
their  permanency,  and  this  difference  is,  at  the 
best,   relative.     They    are   all   subject   to  the 


37^     Enterprise  and  Production 

same  general  laws,  so  long  as  they  retain  their 
characteristic  of  affording  special  advantages  in 
production.  The  eventual  cheapening  of  pro- 
ducts, due  to  the  dissipation  of  rentals,  accrues 
of  course  to  the  consumer,  and  labourers,  in 
their  character  of  consumers,  reap  their  full 
share  of  the  benefit  in  an  increase  in  their 
"  commodity  "  and  "  real  *'  wages.  The  in- 
quiry remains  as  to  whether  they  can  possibly 
get  more  than  their  share.  Some  might  per- 
haps infer  from  President  Walker's  "  Residual 
Law  of  Wages  '*  that  eventually  they  get  all. 
This  is  certainly  not  true  in  the  first  instance, 
as  landlords,  capitalists,  and  enterprisers  are 
consumers  as  well  as  the  labourers.  How  much 
of  their  original  share  of  the  transferred  bene- 
fit these  latter  classes  can  retain  is,  however, 
another  question.  The  fact  that  each  cycle  of 
expansion  and  depression  finds  a  progressive 
nation  in  possession  of  an  increased  capital 
per  capita,  for  which  enterprisers  are  able  to 
find  satisfactory  employment,  shows  that  periods 
of  activity  in  which  profits  are  high  and  labour 
fully  employed  are  longer,  or  at  least  more  ef- 
fective, than  the  alternating  periods  of  depres- 
sion in  which  accumulations  are  pressing  hard 
upon  their  natural  limit.  As  the  above-noted 
transfer  of  rentals  into  other  forms  of  income, 
as  a  general  rule,  widens  the  field  for  invest- 


Trade-Unions  and  Strikes    379 

ment,  their  tendency  must  be  to  prolong  good 
times  and  shorten  hard  times,  which  though 
to  the  labourer's  advantage  is  slightly  less  so 
than  to  that  of  the  other  classes  of  producers. 
This  however  is  probably  more  than  made  up  to 
him  by  the  circumstance  that  the  advances  in 
the  arts,  which  is  only  another  phrase  for  the 
transformation  of  rentals  we  are  discussing, 
has  actually  resulted  in  cheapening  the  com- 
mon things  that  labourers  consume  much  more 
than  the  things  mostly  consumed  by  the  rich. 
As  under  certain  conditions  a  monopoly  can 
be  taxed  without  raising  the  price  of  its  pro- 
duct, it  is  conceivable  that,  by  exacting  higher 
wages  when  employed  in  any  industry  yielding 
a  large  proportion  in  rentals  to  opportunity, 
the  labourers  could  effect  a  transference  from 
rentals  to  wages  that  would  be  a  real  addition 
to  proportional,  commodity,  and  real  wages. 
This  would  involve,  however,  two  or  more 
market  prices  for  labour  in  the  same  market, 
and  a  discrimination  between  employers,  so 
difficult  to  maintain  that  any  addition  to 
real  wages  acquirable  by  this  process  is  prob- 
ably a  negligible  quantity  with  one  exception 
— namely,  an  apparent  tendency  for  the  trusts 
to  pay  higher  wages,  thari  before  the  consolida- 
tion of  interests,  for  the  same  work.  This  is 
of  course  at  the  expense  of  their  rentals  or 


380     Enterprise  and  Production 

profits,  and  is  perhaps  made  up  to  them  in 
what  they  can  afford  to  pay  for  an  avoidance 
of  labour  troubles,  by,  that  is,  a  decrease  in 
the  risks  they  subject  themselves  to,  a  gain 
that  would  go  to  labour  anyway,  however 
the  avoidance  was  obtained.  The  trusts  are 
also  raising  the  average  of  real  wages  by  trans- 
forming so  many  small  enterprisers  into  super- 
intendents and  overseers,  a  highly  paid  class 
of  labourers,  but  this  of  course  does  not  affect 
the  average  real  wages  of  other  labourers. 

Although  we  may  now,  I  hope,  regard  it  as 
proven  that  commodity  or  proportional  wages 
cannot  be  increased  at  the  expense  of  profits, 
however  money  wages  may  be  advanced — be- 
cause the  proportion  of  the  product  enter- 
prisers are  able  to  exact  depends  wholly  upon 
the  gravity  of  the  responsibilities  they  have  to 
assume,  and  not  at  all  upon  the  money  wages 
they  can  be  forced  to  pay — the  question  remains 
whether  something  can  be  obtained  for  the 
labouring  classes,  as  a  whole,  at  the  expense 
of  the  purchasing  power  of  pure  interest  and 
rentals. 

First,  as  to  pure  interest,  the  proportion  of 
the  product  that  accrues  to  it  is  so  small  that 
any  loss  in  the  purchasing  power  of  aggregate 
pure  interest  is  an  almost  negligible  quantity. 
Thus  a  rise  of  10^^  in  general  prices  without  any 


Trade-Unions  and  Strikes    3S1 

change  in  the  money  value  of  the  aggregate  of 
pure  interest,  calculating  that  aggregate  at  3  ^ 
of  the  previous  product  (a  very  liberal  estimate)^ 
would  result,  if  labour  obtained  all  of  it,  in 
a  rise  of  less  than  |-  of  I  ^  in  proportional, 
commodity,  or  real  wages  (65  :  3 : :  10 : 0.461). 
But  even  this  small  gain  for  labour  would  not 
result,  for  the  rate  of  pure  interest  remaining 
the  same,  say  2  ^  of  the  capital  engaged,  the 
money  value  of  both  "  fixed  "  and  **  circulat- 
ing*' capital  will  have  advanced  just  10^,  as 
the  same  amount  of  "capital  goods  "  and  "  capi- 
tal tools "  will,  by  our  supposition,  have  a 
money  value  just  10^  greater  than  before.  So 
that  the  aggregate  of  interest,  expressed  in 
money,  is  increased  by  10  %  and  the  share  of  the 
product  falling  to  capital  will  remain  unchanged 
even  if  the  rate  of  pure  interest  is  not  raised,  as 
it  will  tend  to  be. 

Evidently  the  same  line  of  reasoning  will 
apply  to  rentals  so  far  as  the  opportunities 
afforded  them  are  created  by  investments  of 
capital.  As  under  the  circumstances  supposed 
the  money  cost  of  reproduction  is  increased 
lofoj  the  limit  below  which  such  rentals  cannot 
go  will  be  just  10^  higher.  To  the  extent 
however  that  rentals  accrue  to  such  opportuni- 
ties, or  parts  of  opportunities,  as  are  appropri- 
ated,  the   question  is   more   complicated  and 


382     Enterprise  and  Production 

doubtful,  and  is  less  susceptible  of  precise  de- 
termination. As  a  matter  of  observation  the 
fact  appears  to  be  that  during  periods  of  ad- 
vancing prices  and  money  wages,  the  value  of 
farm  lands  and  of  ground  rentals,  and  the  sell- 
ing prices  of  patent  rights  and  all  other  mono- 
polies and  privileges  advance  in  a  greater  ratio 
than  the  general  rise  in  the  price  of  commodi- 
ties, and  during  a  period  of  declining  prices 
the  values  of  appropriated  opportunities  de- 
cline more  rapidly  than  general  prices.  The 
availability  of  opportunities,  as  any  student  of 
Ricardo  will  appreciate,  is  more  than  propor- 
tionately increased  during  periods  of  industrial 
activity  and  opportunities  will  therefore  com- 
mand a  larger  share  of  the  product  in  such 
times.  It  would  appear  therefore  that  until  the 
culmination  of  the  general  advance  is  reached, 
the  proportion  of  the  product  attainable  by 
labour  will  be  decreased  rather  than  increased 
at  the  expense  of  the  rentals  of  the  appropri- 
ated opportunities.  It  is  evident,  therefore, 
that  the  relations  of  appropriated  opportunities 
to  commodity  and  proportional  wages  is  similar 
to  those  of  capital  and  enterprise  in  direction. 
All  three  obtain  a  smaller  proportion  of  a 
smaller  product  during  hard  times,  and  a  larger 
proportion  of  a  larger  product  during  good 
times.     Labour  can  obtain  no  permanent  ad- 


Trade-Unions  and  Strikes     383 

vantage  at  the  expense  of  opportunity,  capital, 
or  enterprise  by  either  successful  or  unsuccess- 
ful attempts  to  elevate  money  wages  above  the 
point  to  which  the  natural  competition  of  enter- 
prisers will  inevitably  raise  them.  As  employ- 
ers cannot  increase  wages  at  any  time  at  the 
expense  of  rentals  and  interest,  since  these  are 
beyond  their  control,  they  can  only  do  so  by 
raising  general  prices  or  at  the  expense  of 
profit,  which  injures  labour  by  decreasing  the 
amount  of  employment. 

Any  decrease  of  rentals  due  to  the  regula- 
tion of  monopolies  by  the  state  accrues  finally, 
and  after  a  short  interval,  to  the  benefit  of 
labour.  What  we  have  been  discussing  is  only 
what  labourers  can  effect  by  combinations 
among  themselves  towards  the  regulation  of 
distribution.  Strikes  and  trade-unions  cannot 
of  themselves  lessen  the  advantages  conferred 
by  monopoly,  or  hasten  the  transformation 
of  advantages  in  production  into  facilities  of 
production  common  to  all,  nor  can  they 
lessen  the  proportion  of  the  product  the 
monopolists  are  able  to  exact.  The  state,  on 
the  contrary,  possesses  the  means  of  effecting 
these  things.  The  only  question  is  how  far  the 
exercise  of  such  powers  is  advisable — a  matter 
beyond  the  scope  of  our  present  argument, 
further  than  to  remark  that  progress  consists 


384     Enterprise  and  Production 

in  the  appropriation  of  neglected  opportunities 
and  the  restrictions  to  monopoly  must  not  pro- 
ceed to  the  point  where  such  appropriations 
would  be  unduly  discouraged. 

It  is  a  somewhat  curious  circumstance  that 
the  motto  the  trade-unions  have  adopted — 
"An  injury  to  one  is  an  injury  to  all,  and  a 
benefit  to  one  a  benefit  to  all " — is  perhaps 
the  most  inappropriate  one  they  could  have 
selected.  So  far  as  the  ostensible  and  imme- 
diate object  of  the  unions  is  to  raise  their  own 
money  wages,  any  benefits  obtained — and  they 
are  sometimes  very  real — are  at  the  expense  of 
their  fellow-workers.  To  the  other  classes  of 
the  community,  including  employers,  they  may 
indeed  do  harm  by  decreasing  the  total  product 
to  be  divided,  but  it  is  an  injury  for  which 
no  compensating  benefits  accrue  to  any  class. 
Labour  agitation  usually  greatly  injures  and 
sometimes  ruins  individual  employers,  but 
never  to  the  enhancement  of  real  wages.  It 
may  even  ruin  a  particular  trade  or  harm  the 
nation  at  large  by  restricting  its  exports.  In  all 
these  cases  there  is  either  a  transfer  of  demand, 
in  which  case  the  compensating  benefits  are 
reaped  by  other  employers,  or  a  destruction  of 
demand  which  injures  all  classes  alike. 

How  far  trade-unionism  is  responsible  for  the 
**  submerged  tenth  "  is  an  open  question,  but 


Trade-Unions  and  Strikes     385 

that  part  of  the  responsibility  falls  upon  them 
is  evident  from  the  fact  that  the  increased 
wages  in  any  one  of  the  unionised  trades  are 
wholly  a  deduction  from  real  and  commodity 
wages  in  the  excluded  trades,  and  the  smaller 
the  excluded  class  the  more  severe  the  pres- 
sure upon  them  must  be.  In  view  of  this  cir- 
cumstance it  is  certainly  significant  that  it  is 
precisely  in  the  nations  in  which  labour  is  most 
fully  organised  that  the  severest  extremity  of 
poverty  is  found. 

That  the  amount  which  will  be  expended  in 
wages  is  a  fixed  sum,  predetermined  by  the 
social  and  industrial  conditions  that  induce 
enterprisers  to  employ  labourers,  is  obscured 
not  only  to  the  labour  leaders,  but  also  to  many 
economists,  by  the  undoubted  fact  that  labour 
agitation  has  coincided  with  a  very  substantial 
advance  in  real  wages,  and,  "  post  hoc,  propter 
hoc,**  the  latter  is  naturally  attributed  to  it. 
This  rise  in  real  wages  is  however  fully  ac- 
counted for  by  the  "  residual  law  of  wages," 
and  trade-unionism  can  only  be  credited  with 
aiding  it  to  the  extent  in  which  it  has  increased 
the  productive  efficiency  of  labour.  Of  course 
it  is  possible  that  what  unionism  has  effected 
is  simply  the  absorption  of  the  gain  due  to  the 
residual  law  of  wages,  that  would  otherwise 
have  been   distributed   among   all    classes    of 

25 


386    Enterprise  and  Production 

labour.  But  while  this  undoubtedly  accounts 
for  a  great  part  of  their  success,  the  proba- 
bility is  strong  that  another  part,  perhaps 
equally  considerable,  is  obtained  at  the  expense 
of  an  actual  reduction  of  the  commodity  wages 
of  other  labourers. 

The  normal  growth  of  capital  "  per  capita"  af- 
fects proportional  wages  in  two  ways.  The 
greater  the  capital  "  per  capita  "  enterprisers  are 
able  to  find  employment  for  at  a  normal  ex- 
pectation of  profit,  the  greater  the  opportunity 
for  accumulation  becomes,  and  the  lower  the 
normal  rate  of  pure  interest  will  decline,  wholly 
to  the  advantage  of  money,  commodity,  and 
real  wages.  Proportional  wages  may  however 
decline,  as  the  incomes  of  interest  and  profit  on 
the  additional  capital  may  more  than  compen- 
sate for  any  decline  in  their  ratios.  It  will  also 
lead  to  the  appropriation  and  utilisation  of  op- 
portunities that  would  have  been  useless  in  a 
less  stable  and  active  state  of  industry,  thus 
also  increasing  the  aggregate  of  rentals.  The 
changed  conditions  enabling  enterprise  to  em- 
ploy additional  opportunity  and  capital  per 
labourer  increases  the  aggregate  of  profit,  the 
rate  remaining  the  same.  There  is,  of  course, 
a  marked  tendency  for  the  normal  rate  of  profit 
to  decline  as  industry  expands,  but  not  suf- 
ficiently to  reduce  the  share  of  the  product  fall- 


Trade-Unions  and  Strikes     3S7 

ing  to  enterprise  below  that  enjoyed  before  the 
expansion.  The  growth  of  wealth  per  capita 
therefore  leads  to  a  probable  decline  in  the  pro- 
portion of  the  total  product  accruing  to  labour, 
but  without  lowering,  and  indeed  increasing, 
real  wages.  In  other  words,  when  capital  sup- 
plants labour,  while  labourers  as  a  class  are 
greatly  benefited,  they  are  not  benefited  to  the 
same  extent  as  appropriators,  capitalists,  and 
enterprisers,  as  classes,  even  when  there  is  a  co- 
incident decHne  in  the  rates  of  rentals,  interest, 
and  profit. 

But  while  the  efforts  of  the  trade-unions  to 
raise  the  general  average  of  either  proportional, 
commodity,  or  real  wages  are  necessarily  futile 
so  far  as  purely  economic  tendencies  are  thereby 
affected,  it  by  no  means  follows  that  they  can- 
not, and  do  not,  set  in  motion  social  and  indi- 
vidualistic tendencies  which  react  to  improve 
the  labourer's  condition.  Even  the  establish- 
ment of  an  aristocracy  of  labour  is  not  wholly 
indefensible.  The  comparative  efficiency  of 
animal  organisms  is  mainly  dependent  upon 
the  differentiation  of  parts  and  of  functions,  and 
the  same  thing  is  true  of  any  given  social  or 
industrial  group  or  organism.  There  is  no  bet- 
ter observed  fact  than  that  the  more  civilised 
a  people  the  greater  the  diversity  of  economic 
conditions  that  will  be  found  among  them.     Of 


3^8    Enterprise  and  Production 

course  the  wealthier  a  people  the  greater  room 
there  is  for  disparity  in  individual  fortunes, 
but  the  latter  is  a  cause  as  well  as  an  effect  of 
the  former.  No  group  of  individuals  who  are 
not  in  close  touch  with  each  other  can  progress 
far,  and  when  society  is  divided  into  clearly 
marked  divisions  (in  other  words  when  caste 
lines  are  sharply  drawn),  this  close  touch  is  lack- 
ing,— there  are  links  missing  in  the  chain  of 
ideas  connecting  those  at  the  top  with  those  at 
the  bottom.  The  educative  effect  of  trade- 
unionism  can  hardly  be  overrated.  It  has  ele- 
vated the  "man  with  the  hoe"  into  a  serious 
student  of  social  and  economic  conditions.  It 
is  the  leaders  unionism  has  developed,  and  is 
bringing  to  the  front,  to  whom  we  must  look, 
and  on  whom  we  can  safely  depend,  for  the  sal- 
vation of  society  from  the  tendencies  toward 
socialism  and  anarchy  which  are  commencing  to 
threaten  it.  The  men  who  are  daily  acquiring 
greater  influence  with  the  unions  are  thinkers, 
not  so  very  greatly  inferior  to  professed  stu- 
dents and  teachers  in  their  understanding 
of  social  and  economic  problems.  These 
men  are  sure  to  appreciate  very  shortly 
which  among  their  present  efforts  are  mis- 
directed and  inimical  to  the  real  interests  of 
the  labouring  classes  as  a  whole,  and  what 
the    influences   are    which  tend   to    increase 


Trade-Unions  and  Strikes     389 

real  wages  and  how  such  influence  can  be 
fostered. 

They  will  learn  that  the  consumer  is  the  real 
heir  of  all  the  ages,  and  that  the  capitalist,  the 
appropriator,  and  the  enterpriser  have,  as  it 
were,  only  contingent  interests  in  much  of  the 
property  to  which  the  labourer,  as  the  chief 
consumer,  is  the  residuary  legatee,  and  that  the 
final  transfer  to  him  will  be  made  just  as  fast 
as  he  makes  it  easier  for  them  to  perform  their 
economic  functions.  At  present  the  labourer's 
idea  seems  to  be  that  he  can  force  them  to 
accept  less  by  harassing  them,  which  is  about 
as  reasonable  as  persuading  a  labourer  to  accept 
lower  wages  by  making  his  task  harder.  The 
capitalist,  the  appropriator,  and  the  assumer  of 
responsibility  have  each  a  function  to  perform, 
just  as  essential  to  the  productive  process  as 
that  of  the  labourer.  If  any  one  of  the  three  is 
harassed  or  hindered,  not  only  is  the  combined 
product  of  the  four  lessened,  but  the  hindered 
one  gets  the  larger  share  of  what  is  left,  as  is 
mete,  for  it  is  only  at  a  greater  personal  sacrifice 
that  his  special  stint  is  accomplished. 

It  surely  does  not  tax  a  normal  intelligence 
unduly  to  comprehend  that  the  more  the  risks 
to  which  he  has  to  subject  himself  are  removed, 
the  lower  the  rate  of  profit  that  will  content 
the  enterpriser,  and  that  as  the  normal  rate  is 


390      Enterprise  and  Production 

lowered,  enterprise  after  enterprise  that  did  not 
tempt  him  before  will  be  undertaken,  not  only- 
benefiting  the  consumer  by  lower  prices,  thus 
raising  commodity  wages,  but  at  the  same  time 
further  raising  real  wages  through  the  fuller 
employment  of  labour.  The  undertaking  of 
new  enterprises  involves  necessarily  the  appro- 
priation of  additional  opportunities,  besides  an 
increase  of  circulating  capital,  thus  widening 
the  field  for  investment  and  prolonging  the 
period  during  which  labourers  are  fully  em- 
ployed, and  also  further  increasing  wages  as 
opportunities  become  less  and  less  special.  Not 
only  this  but  the  rate  of  pure  interest  is  lowered, 
as  the  greater  the  number  of  those  able  to  save 
the  lower  will  be  the  rate  of  interest  which  will 
content  the  marginal  saver.  This  difference 
also  goes  to  the  increase  of  real  wages,  though 
proportional  wages  may  be  lowered,  because  a 
low  rate  of  interest  on  a  large  amount  of  capital 
may  be  a  greater  percentage  of  the  total  pro- 
duct than  a  higher  rate  of  interest  on  a  lesser 
amount  of  capital.  Thus  the  gains  of  the 
capitalist,  the  enterpriser,  and  the  appropriator 
all  yield  an  addition  to  wages  as  civilisation 
advances. 

Anything  and  everything  that  the  labourers 
can  do— and  they  can  do  much,  especially  when 
organised — to  increase  the  efficiency  of  their 


Trade-Unions  and  Strikes    39 1 

labour,  to  encourage  the  discovery  and  appro- 
priation of  opportunities,  to  widen  the  normal 
limitations  of  accumulation,  and  to  diminish 
the  uncertainties  of  business,  benefits  their  own 
class.  Independent  of  such  proper  regulation 
of  monopoly  as  will  not  discourage  enterprise, 
it  is  by  these  means,  and  these  means  only, 
that  they  can  improve  their  economic  condi- 
tion. Antagonising  the  enterpriser,  the  capi- 
talist, and  the  appropriator  only  obstructs  the 
enterpriser  in  his  endeavours  to  increase  the 
total  product,  and  enables  each  of  the  other 
productive  factors  to  retain,  in  proportion  to 
their  contribution,  a  larger  percentage  of  what 
IS  produced,  thus  cutting  off  the  labourers* 
share  at  both  ends,  as  they  obtain  only  a 
smaller  share  of  a  smaller  product. 

On  the  other  hand,  while  the  "  war  against 
capital,"  as  it  is  at  present  conducted,  is  a  ver- 
itable kicking  against  the  pricks,  which  under  no 
conceivable  circumstances  can  work  anything 
but  injury  to  the  labouring  class  as  a  whole, 
there  is  a  field  of  much  greater  promise  to  which 
the  labour  leaders  are  now  turning  their  atten- 
tion ;  namely,  the  war  against  privilege.  Our 
study  of  the  productive  force  "  Opportunity  " 
enables  us  to  appreciate,  as  never  before,  how 
the  natural  tendency  towards  the  transforma- 
tion of  opportunities  into  mere  facilities  of  pro- 


392     Enterprise  and  Production 

duction  has  been  dammed  and  hindered  in  its 
course  by  all  sorts  of  unjust  laws  and  political 
corruption.  It  would  indeed  be  disastrous  to 
confiscate  opportunities  honestly  acquired  and 
exploited,  but  on  the  other  hand  it  will  soon 
become  an  open  question  whether  the  "  sacred- 
ness  of  vested  interests  "  shall  for  ever  be  suffered 
to  stand  in  the  way  of  the  principle  of  caveat 
emptor^  whether,  that  is,  advantages  in  produc- 
tion, dishonestly  and  dishonourably  acquired, 
and  ruthlessly  exploited,  shall  continue  inviolate 
simply  because  the  ownership  has  been  trans- 
ferred to  innocent  third  parties. 

As  in  political  evolution  power  has  descended 
to  wider  and  wider  classes,  selfish  considerations 
have  become  less  and  less  prevalent  and  over- 
ruling. The  despot  looks  upon  the  state  as  his 
private  property  —  "  L'^tat,  c*est  moi" — and 
does  not  hesitate  to  sacrifice  the  lives  and  pro- 
perty of  his  subjects  to  gratify  his  own  whims 
and  vanity.  An  oligarchy  or  aristocracy,  though 
still  excessively  self-seeking,  is  influenced  not 
only  by  considerations  affecting  themselves  as 
a  group  in  their  relations  to  the  people,  but  also 
by  some  consideration  affecting  the  people  as 
a  whole.  Their  ethical  standard  is  certainly 
superior  to  that  of  the  despot.  A  community 
under  the  political  control  of  the  middle  classes 
has  yet  wider  sympathies  and  a  growing  appre- 


Trade-Unions  and  Strikes   393 

ciation  of  the  solidarity  of  society.  And  finally 
when  the  supremacy  passes  to  the  people  as  a 
whole,  while  the  clashing  of  class  interests  yet 
continues,  and  while  no  political  machinery  has 
yet  been  devised  by  which  the  real  wishes  of 
the  people  are  always  carried  out,  it  has  again 
and  again  been  shown  beyond  question  that  in 
great  exigencies  and  when  issues  are  plainly 
presented,  the  people  can  be  trusted  to  decide 
moral,  social,  and  economic  questions  with  ap- 
proximate correctness,  and  uninfluenced  by  class 
or  selfish  interests,  which,  though  they  still  per- 
sist, in  a  measure  neutralise  each  other,  and  are 
more  or  less  denied  influence  by  a  growing  al- 
truism, which  leads  the  voter  to  consider  the 
ballot  not  as  a  right,  but  as  a  trust. 

I  cannot  but  believe  therefore,  especially  in 
view  of  their  growing  comprehension  of  eco- 
nomic and  social  conditions,  that,  when  the 
crucial  test  comes,  the  trade-unions  will 
abandon  their  present  efforts  to  change  the 
distribution  of  the  product  between  classes  of 
producers,  recognising  the  immutability  of  the 
laws  which  govern  it,  and  that  attempts  of  the 
character  they  are  now  making  lower  real  wages, 
they  will  also  not  be  tempted  to  continue 
them  by  the  selfish  consideration  that  they 
thereby  erect  themselves  into  an  aristocracy  of 
labour,  and  obtain  some  increase  of  wages  at  the 


394     Enterprise  and  Production 

expense  of  a  greater  loss  to  unorganised  labour. 
If  however  they  do  allow  themselves  to  be 
governed  by  selfish  considerations  alone,  their 
purpose  will  ultimately,  but  surely,  be  defeated 
by  the  withdrawal  of  public  sympathy,  or  by  all 
labour  becoming  organised.  That  accomplished, 
it  will  become  so  evident  that  in  antagonising 
the  other  productive  factors,  labour  obtains  a 
smaller  share  of  a  decreased  product,  that  an- 
tagonism to  the  other  factors  will  be  greatly 
modified  and  perhaps  cease,  except  as  it  arises 
from  the  belief  that  the  wages  fund  is  unfairly 
distributed,  or  that  illegitimate  efforts  are  being 
made  to  increase  the  normal  rates  of  rent,  in- 
terest, and  profit,  especially  the  former.  And 
they  will  recognise  that  such  efforts  can  only  be 
restricted  by  social  and  political  action,  and  not 
by  economic  wars. 

There  is  of  course  nothing  new  in  the  idea 
that  labourers  lose  as  consumers  a  part  of 
what  they  gain  through  an  increase  in  their 
money  wages.  But  the  belief  seems  to  be  quite 
prevalent  that  the  balance  is  in  their  favour, 
whereas,  if  this  presentation  of  the  matter  is 
correct,  the  balance  is  the  other  way  and  an 
advance  in  money  wages  is  on  the  whole  detri- 
mental, when  all  the  means  used  to  obtain  it, 
and  all  the  results  following  it,  are  taken  into 
account.     The  real  wages  that  will  be  freely 


Trade-Unions  and  Strikes   395 

offered  labourers,  as  the  result  of  the  competi- 
tion of  enterprisers  to  obtain  control  of  the 
existing  labour  force,  essential  to  the  establish- 
ment of  desired  space  relations,  are  the  ut- 
most obtainable  by  labourers  as  a  class.  The 
effort  to  change  distribution  by  agitation, 
strikes,  and  trade-union  regulations  decreases 
instead  of  increases  the  aggregate  purchasing 
power  expended  in  money  wages,  and  results 
only  in  a  different,  and  probably  a  worse,  dis- 
tribution among  labourers  of  a  smaller  total. 
I  do  not  think  that  this  has  been  perceived,  as 
it  only  becomes  really  evident  when  the  sub- 
ject is  discussed  from  the  standpoint  of  the 
enterpriser.  The  nature  of  profit  must  be  un- 
derstood before  it  can  be  appreciated  that  the 
only  circumstance  which  can  lower  its  normal 
rate  is  the  removal  of  risk, — the  lessening  of 
the  responsibilities  to  be  assumed.  Capital 
must  also  be  conceived  in  its  relations  to  en- 
terprise, before  we  can  obtain  a  satisfactory 
understanding  of  the  influences  regulating  its 
accumulation  and  the  rate  of  pure  interest,  and 
these  are  sure  to  be  adverse  to  the  interests  of 
labourers  when  the  accumulation  of  capital 
is  hindered  by  the  narrowing  of  the  field  for 
investment  that  results  from  the  normal  rate 
of  profit  being  higher  than  it  need  be  if  labour 
agitation  for  higher  wages  should  cease.     In 


39^     Enterprise  and  Production 

the  relation  of  opportunity  to  enterprise  we  do 
indeed  discover  a  theoretic  possibility  of  in- 
creasing wages  at  the  expense  of  rentals  and 
royalties,  but  to  the  slight  extent  this  is  possi- 
ble, except  as  the  result  of  social  and  political 
action,  it  involves  a  somewhat  impracticable 
discrimination  in  the  terms  labourers  will  exact 
from  different  employers  for  the  same  service, 
so  that  in  practice  the  gain  by  strikes  and 
agitation  is  so  slight  as  to  be  negligible,  and 
can  be  better  attained  by  state  regulation  of 
monopolies. 

Besides  the  purely  economic  methods  by 
which  labourers  can  increase  real  wages,  some- 
thing else  can  be  indirectly  accomplished  by 
improving  ethical  and  social  conditions,  and 
thus  increasing  the  productivity  of  the  eco- 
nomic factors.  We  have  seen  the  economic 
importance  of  increasing  the  total  product,  and 
that  of  any  such  increase  the  labourers  recejve 
their  due  proportion.  Despite  a  number  of 
silly  regulations  restricting  the  output,  and  the 
yet  more  serious  restrictions  resulting  from  the 
principle  of  a  minimum  wage,  unionism  has 
probably  increased  rather  than  decreased  the 
efficiency  of  labour.  An  intelligent  man,  even 
when  false  theories  lead  him  to  be  a  bit  of  a 
shirk,  can  hardly  fail  to  be  more  efficient  than 
a  stupid  ignorant  fellow.     The  trade-union  is 


Trade-Unions  and  Strikes    397 

the  labourer's  university,  and  the  wider  range 
of  ideas  it  confers,  and  the  standard  of  intel- 
lectual development  it  sets  up,  are  to  be  sure 
individualistic  gains,  as  are  all  other  matters 
affecting  the  efficiency  of  labourers,  but  none 
the  less  on  that  account  are  they,  and  all  other 
influences  affecting  efficiency  in  production, 
proper  premises  for  economic  deduction. 

But  one  of  the  most  efficacious  methods  by 
which  trade-unionism  can,  and  does,  benefit 
labourers  is  perhaps  to  be  found  in  the  in- 
sistence upon  improvements  in  the  conditions 
under  which  labourers  work  and  live — in  the 
environment  of  labour.  If,  what  is  by  no  means 
an  impossibiHty,  the  average  duration  of  the 
working  men's  lives  could  be  lengthened  five 
years — let  us  say  from  forty  to  forty-five,  during 
eighteen  of  which  no  labour  was  performed — 
labourers  as  a  class  would  have  twenty-seven 
years*  wages  to  support  forty-five  years  of  life, 
instead  of  twenty-two  years'  wages  to  support 
forty  years*  living,  a  gain  of  slightly  over  9^  in 
real  wages  without  any  advance  in  money 
wages,  or  any  decline  in  the  price  of  consum- 
able goods,  to  which  is  to  be  added  the  gain 
both  in  income  and  outgo  resulting  from  the 
smaller  percentage  of  idleness,  due  to  sickness 
or  incapacity  from  accidents  that  would  not 
occur    under    improved  conditions.      A  rigid 


39^     Enterprise  and  Production 

insistence  on  every  possible  safeguard  to  life, 
limb,  and  health,  which  employers  would  surely 
assent  to  without  serious  objection  if  it  were 
insisted  upon,  is  worth  more  to  the  la 
bourer  than  the  advance  in  money  wages  for 
which  he  usually  strikes,  and  the  advantage 
from  which,  even  when  not  temporary, 
is  obtained  wholly  at  the  expense  of  his 
fellows. 

The  idea  I  have  sought  to  express  in  the  pre- 
ceding paragraphs  can  perhaps  be  made  plainer 
and  more  comprehensible  by  a  more  concrete 
presentation.  When  anything,  such  as  war, 
social  unrest,  political  interference  with  the 
cause  of  industry,  growing  lawlessness,  or  un- 
wise and  dictatorial  labour  agitations  occurs  to 
increase  the  risks  of  business,  both  the  normal 
and  the  average  rates  of  profit  will  be  surely 
advanced.  The  aggregate  production  will  of 
course  be  decreased,  but  enterprisers  will  get  a 
larger  share  of  what  is  produced.  Both  the 
normal  and  the  average  rates  of  profit  depend 
wholly  upon  the  subjective  valuations  enter- 
prisers put  upon  the  risks  involved  in  the  opera- 
tions in  which  they  engage.  The  more  these 
risks  are  increased,  the  greater  the  share  of  the 
product  they  will  demand  and  secure.  They 
suffer  indeed  with  the  rest  of  the  community 
from   the  decline  of  industry   resulting   in   a 


Trade-Unions  and  Strikes    399 

lessened  product,  but  they  do  not  suffer  in 
the  same  proportion. 

When  anything  occurs  to  increase  the  diffi- 
culty of  saving,  the  rate  of  pure  interest  will  be 
correspondingly  advanced,  and  to  this  extent 
capitalists  will  secure  a  larger  share  of  the 
lessened  product.  On  the  other  hand  the 
higher  the  rate  of  pure  interest,  the  smaller  the 
amount  of  capital  employed  per  capita  the 
enterprisers  can  find  a  profitable  use  for.  To 
the  extent  that  accumulations  are  thus  restricted 
the  capitalists  will  receive  a  smaller  share  of  a 
lessened  product.  And  the  history  of  industry 
shows  beyond  question  that  capitalists  as  a 
class  lose  much  more  from  this  cause  than  they 
gain  through  an  increase  in  the  rate  of  pure  in- 
terest, though  of  course  it  is  conceivable  that 
circumstances  might  exist  in  which  the  reverse 
was  true. 

As  to  the  owners  of  "  fixed  capital,"  land, 
and  other  forms  of  opportunity,  their  pos- 
ition is  evidently  analogous  to  that  of  the 
capitalists,  except  that  the  influences  at  work 
are  more  variable  and  intensified.  They 
gain  by  any  rise  in  rentals,  royalty,  and 
hire,  but  lose  as  a  body  in  the  decreased 
amount  of  opportunities  enterprisers  can  use 
at  the  increased  charge.  It  is  not  however 
as    easy    in     their   case   as    in    that    of    the 


400     Enterprise  and  Production 

capitalists  to  determine  which  way  the  balance 
inclines. 

The  point  to  be  observed  here  is  that  the 
body  of  enterprisers  settle  by  competition 
among  themselves  the  rate  of  profit,  and  there- 
fore the  share  of  the  total  product  they  will 
obtain.  Capitalists  and  the  owners  of  oppor- 
tunities on  the  other  hand,  while  by  like  com- 
petition among  themselves  they  can  settle  the 
rate  of  interest,  and  the  rate  of  rentals,  hires, 
and  royalties,  do  not  thereby  fix  the  share  of 
the  total  product  they  obtain,  because  that 
share  depends  not  only  on  these  rates  but  also 
upon  the  amount  of  capital  and  opportuni- 
ties that  can  be  profitably  employed  by  en- 
terprisers ;  and  this  amount  is  determined, 
not  by  them  but  by  the  enterprisers,  who  will 
not  employ  more  capital  and  opportunities 
than  will  leave  profits,  the  share  of  the  product 
enterprisers  have  set  apart  for  themselves. 

The  position  of  the  labourers  differs  from 
that  of  the  three  other  productive  factors  in 
that  they  have  no  influence  at  all  in  determin- 
ing the  share  of  the  product  that  will  fall  to 
them.  Enterprisers  do  not  pay  capitalists  such 
interest  and  owners  of  opportunities  such  rents, 
hires,  and  royalties  as  the  cost  of  labour  allows, 
after  reserving  a  satisfactory  chance  of  profit 
for  themselves.     But  they  do  pay  such  wages 


Trade-Unions  and  Strikes   40^ 

only  as  the  prevailing  rates  of  interest,  rentals, 
and  profits  allow.  When  wages  are  higher  than 
this,  employment  of  labourers  is  decreased  un- 
til adjusted  to  the  aforesaid  prevailing  rates, 
and  when  lower,  employment  is  correspondingly 
increased.  When  anything  occurs  to  affect  the 
productivity  of  labour,  the  ease  or  difficulty 
with  which  labourers  perform  their  industrial 
function,  the  total  product  of  industry  is  of 
course  increased  or  decreased  as  the  case  may 
be,  but  the  share  of  the  product  accruing  to 
labour  is  unaffected,  other  circumstances  of 
course  remaining  the  same. 

When,  however,  other  circumstances  do  not 
remain  the  same,  the  share  that  will  fall  to 
labour  depends  not  at  all  upon  the  labourers 
themselves,  but  upon  the  actions  and  decisions 
of  those  controlling  the  three  other  productive 
factors.  The  only  way  to  increase  the  share  of 
the  product  that  falls  to  labour  is  to  make  it 
easier  for  the  enterpriser,  the  accumulator,  and 
the  appropriator  to  perform  their  industrial 
functions,  and  harder  for  the  latter  to  mono- 
polise appropriations,  provided  of  course  this  is 
not  carried  to  the  extent  of  discouraging  the 
appropriation  of  neglected  or  undiscovered 
opportunities. 


36 


CHAPTER  XII 

THE  TRUSTS 

THE  signs  of  the  times  indicate  that  we  are 
now  undergoing  another  development  of 
the  productive  process,  in  which  the  function  of 
the  enterpriser  will  devolve  less  and  less  upon 
individuals,  or  upon  competitive  groups  of  indi- 
viduals engaged  in  the  same  business,  and  more 
and  more  upon  groups  inclusive  of  all,  or  nearly 
all,  those  who  assume  the  risks  of  producing 
each  particular  kind  of  product  or  group  of  pro- 
ducts. If  the  past  stages  of  the  process  have 
been  hard  to  unravel,  it  is  certainly  hazardous 
to  prophesy  what  this  further  step  will  lead  to. 
To  many  it  seems  dangerous,  to  others  full  of 
promise,  especially  those  who  regard  it  as 
the  culmination  of  economic  activity,  prepara- 
tory to  the  final  evolution  in  which  economic 
endeavour  will  be  merged  in  social,  and  the  com- 
bination of  individuals  for  definite  and  pre- 
arranged personal  purposes  will  be  prohibited 
402 


The  Trusts  403 

by  the  state  and  abandoned.  The  subject  as  a 
whole  is  beyond  the  scope  of  this  treatise,  and 
I  will  not  attempt  its  solution  further  than  to 
point  out  some  tendencies  which  should  be 
found  operative  if  the  theories  here  advanced 
are  well  founded. 

The  first  circumstance  to  which  I  would  call 
attention  is  that  the  subject  is  complicated  by 
the  fact  that  the  income  of  trusts  is  composite. 
They  are  not  only  enterprisers  but  to  a  much 
greater  extent  than  individual  entrepreneurs 
they  are  also  capitalists  and  the  owners  of  op- 
portunities. The  complication  does  not  arise 
so  much  from  their  owning  most  of  the  capital 
they  employ  because  the  rate  of  interest  on 
capital  is  so  well  settled  and  understood  that 
those  who  control  the  trusts  are  fully  cognisant 
of  what  part  of  the  trust  gains  are  interest.  It 
is  different  however  with  that  portion  of  the 
gain  rightly  attributable  to  the  possession  of 
special  advantages  and  opportunities — that  part 
composed  of  "  rent "  in  the  broad  content  of 
the  term  as  here  employed.  There  is  no  rate 
of  rent  in  the  sense  in  which  there  is  a  rate  of 
interest  or  of  profit.  There  is  of  course  a  ratio 
between  what  is  paid  for  the  use  of  an  oppor- 
tunity and  its  capitalised  value.  But  not  only 
are  many  advantages  incapable  of  being  capi- 
talised  or  not   capitalised   because   employed 


404    Enterprise  and  Production 

only  by  those  who  own  them,  but  when  capital- 
ised the  capitalised  value  depends  upon  the 
rent  they  yield — and  changes  as  the  amount  of 
rent  received  increases  or  decreases — whereas 
the  amount  of  capital  remains  unaffected  by 
changes  in  the  rates  of  interest  and  profit,  ex- 
cept of  course  as  such  changes  stimulate  or  dis- 
courage accumulation  and  enterprise.  There  is 
therefore  no  rate  of  rent  to  guide  the  individual 
or  corporation  that  is  both  enterpriser  and  the 
possessor  of  special  advantages  in  apportioning 
his  income  between  the  two  functions  he  exer- 
cises. Consequently  he  always  thinks  of  it  as 
homogeneous  and  considers  as  his  profit  all 
he  gets  after  satisfying  the  claims  of  labour,  of 
capital,  and  of  such  advantages  in  production 
as  he  actually  pays  rentals  or  royalties  for. 

That  this  discrimination  should  be  made  is 
however  a  very  necessary  preliminary  to  a 
scientific  inquiry  into  the  trust  problem,  for  it 
is  precisely  that  part  of  the  trusts'  income 
arising  from  privileges  and  advantages  which 
is  in  question. 

When  we  realise  that  every  advantage  in 
production  is  created  partly  by  investment  and 
partly  by  appropriation,  it  likewise  becomes 
evident  that  the  question  is  again  narrowed  to 
such  portion  as  is  due  to  appropriation,  and 
becomes  an  inquiry  into  the  principles  which 


The  Trusts  405 

should  govern  society  in  encouraging,  permit- 
ting, protecting,  regulating,  prohibiting,  or 
punishing  appropriations  of  advantage.  Al- 
though their  application  is  another  and  a  much 
more  difficult  matter,  into  which  we  cannot 
enter  here,  the  broad  principles  which  should 
govern  state  action  are  comparatively  easy  of 
determination.  They  may  perhaps  be  stated 
as  follows: 

The  creation  of  advantages  by  prohibiting 
or  preventing  others  from  employing  existing 
facilities,  or  in  other  words,  creating  advantages 
for  some  individuals  by  disadvantaging  other 
individuals,  is  wholly  indefensible.  Monopolies 
of  this  character  used  to  be  created  for  court 
favourites,  and  were  simply  robberies  of  the 
community  for  the  benefit  of  the  favoured 
monopolists.  As  has  been  shown  elsewhere, 
this  form  of  monopoly  is  not  only  an  unjust 
discrimination  between  individuals  but  an  in- 
jury to  the  community  as  a  whole  and  including 
the  monopolists,  as  it  must  always  lead  to  a 
decrease  in  the  total  product  and  annual  income 
of  society.  Any  successful  attempt  of  the  trusts 
to  raise  prices  above  what  they  would  have 
been  if  the  combination  into  a  trust  had  not 
been  effected  is  of  this  character,  and  wholly 
indefensible  on  economic,  social,  or  ethical 
grounds.     What  methods  of  defeating  such 


4o6     Enterprise  and  Production 

attempts  are  both  wise  and  practicable  is  a 
matter  beyond  the  scope  of  this  treatise.  It  is 
in  place  however  to  remark  that  the  power  of 
the  trusts  to  effect  this  is  more  limited  than  is 
generally  supposed,  as  there  are  certain  counter- 
acting influences  that  to  some  extent  at  least 
re-adjust  matters.  The  avoidance  of  just  taxa- 
tion, and  the  destruction  of  competitors  by  the 
various  methods  of  unfair  competition  to  which 
so  much  attention  has  been  lately  given,  come 
under  this  head.  So  also  does  the  obtaining  of 
freight  rebates,  except  to  the  extent  in  which 
they  are  granted  to  cover  the  actual  saving  to 
the  railroad  in  handling  large  consignments  in 
place  of  the  same  amount  of  freight  in  such 
smaller  consignments  as  would  have  come  to  it 
if  no  trust  had  been  formed.  This  saving  is  a 
real  decrease  in  cost  of  production,  and  belongs 
primarily  at  least  to  those  who  effect  it. 

There  are  however  appropriations  of  existing 
facilities  obtainable  by  the  exclusion  of  other 
competitors  which  result  in  an  increase  of  pro- 
duct. Suchwas  the  original  appropriation  of  the 
soil  by  individuals,  the  result  of  which  has  been 
the  economic  and  social  evolution  from  wander- 
ing tribes  of  herdsmen  to  the  civilised  societies 
of  the  present.  This  appropriation  has  not  only 
been  of  enormous  benefit  to  society  as  a  whole, 
but  those  who  are  excluded  from  possessing 


The  Trusts  407 

their  quota  of  the  soil  are  vastly  better  off  than 
if  the  social  organism  had  remained  migratory 
or  communistic.  It  is  on  this  fact  that  the  ethi- 
cal, social,  and  economic  validity  of  title  deeds 
rests.  The  original  claimants  were  enterprisers 
and  the  land  they  appropriated  was  their  pro- 
duct. Subjecting  themselves  to  the  responsi- 
bilities of  ownership  the  product  belonged  to 
them  and  belongs  to  their  present  representa- 
tives however  its  value  has  changed  and  inde- 
pendent of  what  circumstances  have  led  to  any 
enhancement  of  value.  Any  such  enhancement 
of  value  was  a  profit,  and  as  a  profit  is  an  earn- 
ing as  surely  as  and  in  exactly  the  same  sense  as 
wages  and  interest  are,  there  is,  and  can  be,  no 
such  thing  as  an  "unearned  increment,"  as  un- 
fortunate and  misleading  a  phrase  as  ever  was 
coined,  and  one  responsible  perhaps  for  more 
hatred,  envy,  and  uncharitableness  and  more 
misunderstanding  of  economic  principles  than 
any  other.  It  must  never  be  forgotten  however 
that  as  the  title  to  the  soil  depends  for  its  vaHd- 
ity  upon  the  use  made  of  the  soil  no  possessor 
has  a  right  to  withold  it  from  the  most  produc- 
tive use  of  which  it  is  capable.  Neither  can  the 
ownership  of  the  soil  confer  any  economic  or 
equitable  right  to  rack-rent  tenants.  Rack-rent- 
ing may  be  defined  as  taking  advantage  of  pe- 
culiar circumstances  to  exact  a  greater  rental 


4o8     Enterprise  and  Production 

than  free  competition  would  apportion.  It  is  of 
exactly  the  same  nature  as  excessive  prices 
extorted  by  monopoHsing  trusts  and  wholly 
indefensible. 

Extreme  individualists  will  of  course  claim 
that  the  state  has  no  right  to  take  fifty  cents 
away  from  Peter  to  put  a  dollar  in  Paul's 
pocket.  And  this  much  may  be  granted  them, 
that  the  attempt  is  unwise  unless  the  result  is 
fairly  well  assured.  But  it  is  one  of  the  merits 
of  the  definition  of  the  science  I  have  proposed 
that  it  exposes  the  falsity  of  the  extreme  indi- 
vidualistic assumption.  The  fact  that  there  are 
three  possible  methods  of  attaining  ends  implies 
the  right  of  selecting  and  adopting  the  one  best 
adapted  for  the  attainment  of  our  purposes. 
Manifestly  the  final  choice  cannot  be  left  to  the 
individual  (despite  just  this  being  the  claim  of 
the  anarchist)  because  as  unanimity  could  never 
be  obtained  the  possibility  of  social  action 
would  be  taken  away.  Any  one  therefore 
adopting  our  definition  must  deny  himself  the 
privilege  of  adopting  the  extreme  individualistic 
view.  Neither  can  he  be  an  extreme  socialist. 
It  is  so  self-evident  that  some  ends  are  best  ob- 
tained through  combination  for  personal  pur- 
poses that  we  stultify  ourselves  in  claiming  that 
an  advantage  to  society  can  arise  by  prohibiting 
such  combinations  entirely.     Perhaps  it  is  not 


The  Trusts  409 

quite  wise  to  warn  these  two  numerous  classes 
off  my  premises,  but  the  logical  necessity  is 
imperative. 

The  applicability  of  what  has  been  said  to 
the  subject  of  trusts  is  this.  Occasions  are 
constantly  arising  when  greatly  to  be  desired 
ends  are  incapable  of  practical  accomplishment 
by  either  the  individualistic  or  the  social  method, 
and  will  not  be  undertaken  by  individual  enter- 
prisers or  even  by  corporate  enterprise  unless 
protected  by  some  monopolistic  privilege.  The 
state  has  granted  in  the  past,  and  undoubtedly 
will  continue  to  grant  in  the  future,  great  and 
valuable  privileges  of  this  character  in  the  shape 
of  gifts,  loans,  remission  of  taxes,  rights  of  way, 
and  franchises.  We  have  in  these  cases  artificial 
monopolies  due  to  the  transfer  of  opportunities 
from  hands  in  which  they  were  of  little  worth 
to  hands  capable  of  utilising  them  to  much 
greater  advantage.  Peter  has  been  deprived  of 
fifty  cents  and  a  dollar  put  in  Paul's  pocket  and 
another  dollar  or  two  perhaps  distributed  among 
the  rest  of  the  community.  Now  "  Public 
Utilities  "  or  corporations  **  affected  "  or  (as  they 
themselves  are  beginning  to  feel)  "  afiflicted  " 
with  a  public  use  necessarily  enjoy  privileges 
of  this  character  and  as  necessarily  are  trusts,  as 
within  a  certain  sphere  at  least,  they  are  pro- 
tected from  competition. 


4IO     Enterprise  and  Production 

It  sometimes  happens  that  Paul  gets  only  a 
part  of  his  expected  dollar  and  sometimes  he 
does  not  get  anything  but  loses  a  part  or  the 
whole  of  the  capital  he  ventured.  In  which  case 
we  are  rather  contemptuously  sorry  for  Paul, 
or  perhaps  honour  him  for  his  public  spirit  and 
self-sacrifice,  but  we  never  think  of  reimbursing 
him.  In  other  cases  Paul  is  more  fortunate  and 
gets  not  only  the  contemplated  dollar  but  two, 
three,  or  four  dollars  in  addition.  This  is  an- 
other matter.  Everybody  thinks  he  is  Peter 
and  joins  in  the  cry  of  stop  thief,  and  seems  to 
be  the  more  vociferous  the  more  generously 
his  lost  fifty  cents  has  been  made  up  to  him  and 
a  dollar  put  in  his  other  pocket  as  a  member  of 
the  community.  Witness  the  animosity  of  the 
western  farmer  against  the  railroads  despite  the 
fact  that  the  railroads  have  put  perhaps  five 
dollars  in  his  pocket  to  each  dollar  they  have 
distributed  in  dividends. 

Now  what  right  have  the  assembled  Peters 
who  constitute  the  community  and  wield  the 
arbitrary  power  of  the  state  to  assume  this  at- 
titude and  how  far  is  it  wise  in  them  to  assert 
such  rights  as  they  really  have  ? 

Undoubtedly  our  legislatures  have  been  re- 
miss, careless,  and  corrupt,  and  a  considerable  pro- 
portion of  the  privileges  and  advantages  in  pro- 
duction in  question  were  granted  unnecessarily. 


The  Trusts  41 1 

unwittingly,  or  corruptly.  Unforeseen  circum- 
stances, some  of  which  might  and  could  have 
been  foreseen,  and  some  which  no  foresight  could 
have  discerned,  have  impaired  or  enhanced  the 
value  of  the  privileges  given.  To  what  extent 
do  these  things  impair  the  validity  of  the  grant  ? 

The  right  of  the  state  to  rescind  franchises 
originally  obtained  by  bribery,  by  political  man- 
ipulation, by  misrepresentation,  or  by  conceal- 
ment of  the  real  purposes  for  which  the  privi- 
lege was  desired,  cannot  be  questioned.  Nor 
can  any  statute  of  limitation  or  any  sanctity  of 
the  vested  rights  of  innocent  purchasers  be  held 
as  a  bar  to  the  abstract  right  of  the  state  to 
withdraw  its  gifts  when  corruptly  obtained, 
though  the  wisdom  of  exerting  the  right  ex- 
cept in  very  extreme  or  very  recent  cases  is 
open  to  doubt. 

The  grant  of  an  exclusive  use  of  an  advantage 
in  production  confers  not  only  a  privilege  but 
imposes  implied  obligations  not  necessarily 
mentioned  in  the  grant  itself  and  the  state  has 
the  undoubted  right  of  insisting  that  these  ob- 
ligations be  lived  up  to  and  to  punish  any  dis- 
regard of  them,  and  the  decision  of  what  these 
obligations  are  rests  of  course  with  the  courts. 

It  is  also  open  to  doubt  whether  the  state 
can  bind  itself  in  perpetuity,  and  how  far  one 
generation  can  barter  or  give  away  the  rights  of 


412     Enterprise  and  Production 

its  successors,  but  this  is  too  complicated  and 
erudite  a  question  to  be  taken  up  here. 

But  when  the  assertion  is  made  (and  it  is  the 
assertion  made  by  almost  everybody  at  the 
present  time)  that  those  trusts  and  corporations, 
such  as  many  of  our  railroads,  in  possession  and 
enjoyment  of  honestly  acquired  franchises  owe 
their  prosperity  to  "  an  unearned  increment  " 
and  are  entitled  only  to  such  return  on  their  in- 
vestment as  our  legislators  and  courts  regard  as 
**fair,"  (what  is  "fair"  to  be  ascertained  by  com- 
parison with  the  rate  of  return  other  industries 
are  obtaining),  the  theory  of  the  productive 
process  here  advanced  forces  any  one  accepting 
it  to  a  most  emphatic  dissent.  Profit  is  just  as 
truly  earned,  however  small  or  however  large  it 
turns  out  to  be,  as  wages  or  interest.  When  the 
validity  of  the  original  charter  cannot  be  im- 
pugned the  state  has  absolutely  no  moral  or 
economic  right  to  regulate  railroad  rates  and 
charges  so  long  as  they  do  not  discriminate 
between  persons  or  places.  Unless  of  course 
the  right  to  exercise  such  supervision  was 
originally  retained  by  the  state  such  regulation 
is  confiscation,  and  only  justifiable,  like  other 
cases  of  confiscation  of  property  or  of  person, 
when  demanded  by  a  social  necessity.  More- 
over the  present  attempt  to  deprive  enterprisers 
of  a  part  of  their  legitimate  profits  because  they 


The  Trusts  4^3 

have  turned  out  to  be  larger  than  was  expected 
is  as  foolish  as  it  is  wrong.  As  has  been  shown 
it  is  the  unpredetermined  residue  which  is  the 
motive  power  of  all  human  activity  and  the  at- 
tempt to  predetermine  it  or  to  predetermine  its 
maximum  limit  is  no  more  sensible  than  it  would 
be  to  file  half  through  the  mainspring  of  a 
watch.  Just  as  we  limit  enterprise  will  we 
block  progress  and  civilisation  and  decrease  the 
total  product  to  be  divided  among  the  produc- 
tive factors.  If  you  take  away  the  chance  of 
occasionally  obtaining  an  unexpectedly  large 
profit  what  you  accomplish  is  to  surely  raise 
the  subjective  valuation  of  all  risks  and  this 
means  of  course  an  inevitable  increase  in  the 
marginal  expectation  of  profit  that  will  induce 
enterprisers  to  undertake  enterprises — and  this 
means  declining  industry,  a  higher  rate  but 
smaller  aggregate  of  interest  and  profit,  a  low- 
ered aggregate  of  rentals,  and  both  lower  wages 
and  less  employment  for  labour. 

There  is  indeed  much  that  needs  adjustment 
but  the  proper  point  of  attack  is  not  profit  or 
interest  or  legitimate  rentals ;  but,  first,  illegiti- 
mate rentals,  that  is  unjustly  acquired  privileges 
and  monopolies  that  have  merely  transferred 
opportunities  without  thereby  increasing  the 
facilities  for  production;  second,  all  attempts 
to  escape  the  tacit  obligations  necessarily  at- 


414     Enterprise  and  Production 

tached  to  all  acquired  facilities  or  advantages, 
such  for  instance  as  the  character  of  the  services 
rendered,  the  environment  of  the  labourers  en- 
gaged ;  and,  third,  to  insure  that  the  social  and 
moral,  that  is  to  say,  the  non-economic  products, 
shall  not  be  deteriorated  in  quantity  or  quality. 

All  these  matters  are  of  course  under  the  do- 
minion of  the  police  power,  which  is  practically 
founded  on  the  assertion  of  the  dominance  of 
social  over  individual  interests.  The  right  of  the 
state  to  interfere  when  extortion  is  attempted 
comes  under  the  same  head,  but  it  is  extremely 
difficult  to  draw  the  line  between  what  is  extor- 
tion and  what  not.  Perhaps  the  line  can  be 
best  drawn  by  considering  any  price  extortion- 
ate which  is  greater  than  the  price  that  would 
have  been  natural  if  the  new  facilities  in  question 
had  not  been  appropriated. 

This  of  course  would  leave  the  owners  of 
franchises  and  the  trusts  free  to  retain  for  them- 
selves all  that  part  of  the  product  which  arises 
from  the  legitimate  use  of  the  special  facilities 
and  advantages  they  enjoy,  or  in  other  words 
to  continuously  absorb  if  they  can  all  the  sav- 
ing that  has  been  made  in  cost  of  production. 
As  we  have  seen,  the  natural  course  is  that  such 
gains,  at  first  accruing  wholly  to  the  owners 
of  the  opportunities  which  enable  them  to  be 
created,  will  gradually  be   distributed  among 


The  Trusts  4^5 

the  rest  of  the  community  in  their  character  of 
consumers.  This  tendency  is  usually  spoken  of 
as  the  **  Residual  Law  of  Wages.**  But  the  very 
object  of  the  trusts  and  all  other  monopolies  is 
to  block  this  natural  tendency  and  retain  for 
themselves  all  of  the  benefit  continuously,  or  as 
much  of  it  as  they  can.  If  they  should  succeed 
in  this,  the  rest  of  the  community  would  be  no 
worse  off  than  before;  and  if  it  is  true  that  every 
one  is  entitled  to  what  he  produces,  the  trusts 
are  clearly  entitled  to  all  of  this  benefit  they 
can  retain. 

Nevertheless  if  hereafter  all  the  fruits  of 
progress  or  even  a  much  larger  proportion  of 
these  fruits  than  before  are  to  be  retained  by 
those  who  have  created  or  acquired  the  special 
advantages  and  facilities  which  have  made  the 
increase  possible,  instead  of  being  finally  dis- 
tributed among  consumers,  the  social  and  eco- 
nomic change  will  be  an  enormous  one  and  one 
that  may  well  give  us  pause.  That  the  trust  is 
by  far  the  most  efficient  instrument  to  effect 
this  that  has  yet  been  tried,  goes  without  say- 
ing. And  that  to  a  certain  extent  this  purpose 
of  the  trusts  is  being  accomplished  cannot  be 
denied.  Of  course  to  the  extent  that  the  owner- 
ship of  the  trusts  is  scattered  no  harm  is  done. 
So  far  as  the  same  circumstance  both  increases 
a  person's  income  and  reduces  its  purchasing 


41 6     Enterprise  and  Production 

power  correspondingly  no  real  change  of  welfare 
has  occurred.  To  the  extent  in  which  labourers 
are  also  stockholders  they  are  not  harmed  by 
the  proportion  in  which  the  product  is  divided 
between  wages  and  dividends.  Since  the  com- 
mencement of  industry  the  possessors  of  special 
facilities  have  always  sought  to  keep  the  ad- 
vantage to  themselves  and  have  always  been 
more  or  less  successful  at  first,  but  never  suc- 
cessful in  the  end  except  as  the  possessors  of 
such  naturally  limited  facilities  as  those  afforded 
by  the  possession  of  the  soil.  The  gradual  distri- 
bution of  the  facility  and  consequent  dissipation 
of  the  advantage  has  been  effected  by  competi- 
tion of  enterprisers  with  enterprisers,  each  en- 
deavouringto  possess  himself  of  facilities  as  good 
as  or  better  than  those  now  yielding  a  rental, 
royalty,  or  hire.  The  very  object  of  trusts  and 
of  all  combinations  for  establishing  monopoly 
is  of  course  to  block  this  natural  process  by 
preventing  the  competition  from  which  it  re- 
sults. But  every  individual  producer  who 
makes  a  secret  of  his  process,  who  dissembles 
his  profits,  who  forestalls  others  in  any  way, 
attempts  exactly  the  same  thing  only  less  ef- 
fectively, and  is  held  blameless  in  so  doing. 
The  question  naturally  arises,  whether  a  trust 
that  seeks  to  retain  for  its  owners  only  the  sav- 
ings effected  in  cost  of  production  due  either  to 


The  Trusts  417 

operating  on  a  larger  scale,  savings  in  the  cost 
of  marketing,  or  to  improved  processes  is  socially 
and  economically  guilty  merely  because  it  suc- 
ceeds in  accomplishing  permanently  what  every 
producer  tries  to  do  but  only  succeeds  in  accom- 
plishing temporarily. 

The  decision  of  questions  such  as  this  cannot 
be  left  to  Economics.  The  answer  must  be  found 
in  social  and  individualistic  considerations.  So 
far  as  advantages  are  created  by  investment  they 
can  evidently  be  safely  trusted  to  the  levelling 
action  of  competition.  So  far  as  they  are  ap- 
propriations, however,  though  this  seems  to 
have  been  safe  and  equitable  enough  in  the 
past,  it  is  now  becoming  less  safe,  equitable,  and 
wise.  The  interest  of  society  as  a  whole  must 
manifestly  determine  the  proper  policy  to  be 
pursued.  As  the  appropriation  of  undiscovered 
and  neglected  opportunities  and  advantages  is 
exactly  what  constitutes  progress  and  the  ad- 
vance in  material  civilisation,  what  society  can 
least  afford  is  any  policy  which  discourages  such 
appropriations,  and  so  far  in  the  history  of  the 
world  the  only  effective  inducement  for  making 
them  has  been  found  in  allowing  the  discoverer 
of  a  better  way  of  doing  anything  to  reap  the 
advantage  of  it  for  himself  as  long  as  he  could. 
Society  has  even  gone  further  than  this  in  patent 
laws.     What  these  laws  really  do  is  simply  to 


41 8     Enterprise  and  Production 

aid  the  appropriator  of  a  facility  in  production 
in  retaining  it  for  himself  longer  than  he  would 
otherwise  be  able  to. 

Now  if  the  only  way  of  creating  or  appropri- 
ating a  facility  of  production  were  to  allow  its 
first  appropriators  to  monopolise  its  benefits  for 
ever  it  would  be  socially  wise  to  let  them  do  so. 
The  appropriators  are  themselves  units  in  the 
community  and  whatever  benefits  them  without 
injuring  the  other  units  manifestly  increases  the 
total  and  average  weal  of  society.  On  the  other 
hand  a  new  facility  that  is  free  to  all  from  the  be- 
ginning (provided  of  course  its  use  is  as  quickly 
and  generally  adopted)  is  more  productive  of 
utility  than  it  can  be  when  monopolised,  be- 
cause a  monopolised  article  from  the  higher  price 
necessarily  exacted  for  it  cannot  come  into  as 
general  use.  In  addition  therefore  to  any  gain 
attributable  to  a  more  even  distribution  of  its 
total  product  society  gains  in  the  amount  and 
utility  of  the  total  product  by  restricting  mo- 
nopoly gains.  In  other  words  allowing  mo- 
nopoly gains  is  the  price  society  must  pay  for 
progress,  and  the  restriction  of  monopolies  by 
the  state  becomes  simply  a  question  of  propor- 
tion. Any  restriction  tends  to  discourage  the 
discovery  and  appropriation  of  better  ways  of 
doing  things,  so  long  at  least  as  the  monopolisers 
are  not  attempting  to  obtain  more  than  the  real 


The  Trusts  4^9 

reduction  they  have  effected  in  cost  of  produc- 
tion ;  but  manifestly  if  they  are  allowed  to  re- 
tain the  whole  of  the  reduction  for  ever  the  rest 
of  society  will  not  be  benefited.  The  moral 
question  involved  is  entirely  beyond  the  scope 
of  this  treatise,  but  I  may  be  allowed  to  ob- 
serve that  the  way  of  doing  a  thing  existed 
before  its  discovery  and  its  discovery  and  ap- 
propriation cannot  therefore  give  an  absolutely 
exclusive  moral  title  to  it.  All  the  original  ap- 
propriator  will  in  any  event  have  a  moral 
right  to  demand  is  that  others  to  obtain  a 
right  to  its  use  shall  discover  it  for  themselves 
and  shall  refrain  from  imitating  him  until  they 
have.  We  find  an  instance  of  this  claim  in 
charges  of  plagiarism. 

The  ethics  of  the  matter  however  lies  deeper 
than  this, — there  is  always  the  implied  obligation 
that  an  appropriated  facility  should  be  utilised 
as  productively  as  possible.  Our  title  to  this 
continent  is  founded  on  this  principle,  in  accord- 
ance with  which  we  were  fully  justified  in  dis- 
possessing the  Indians.  Society  has  therefore 
the  undoubted  moral  and  economic  right  of  re- 
stricting monopoly  when  it  reaches  the  point 
where  more  harm  is  done  by  restricting  produc- 
tion than  benefit  gained  by  encouragement  to 
the  discovery  and  utilisation  of  overlooked 
opportunities. 


420     Enterprise  and  Production 

It  is  also  a  matter  of  great  doubt  that  the 
hope  of  perpetuated  advantages  such  as  the 
trusts  seek  to  establish  would  be  as  strong  and 
effective  a  stimulus  to  the  discovery  and  ap- 
propriation of  neglected  opportunities  as  the 
temporary  and  the  naturally  diminishing 
advantages  of  the  past  have  proved  themselves. 
It  is  human  nature  to  **  let  well  enough  alone  " 
and  it  has  been  the  keen  pressure  of  competition 
rather  than  dreams  of  excessive  wealth  that 
has  led  to  the  appropriations  of  the  past.  It 
is  too  soon  perhaps  to  speak  positively  as  to 
this  tendency,  but  the  least  indubitable  indica- 
tion that  the  trusts  are  discouraging  invention 
and  discovery  would  afford  good  ethical,  social, 
and  economic  ground  for  restricting  them. 

The  Theory  of  the  Productive  Process  I  have 
ventured  to  advance  yields  us,  I  think,  a  more 
comprehensive  and  well-proportioned  view  of 
the  Trust  Question,  or  rather  perhaps  of  the 
problem  of  Monopoly.  It  has  not  enabled  us 
perhaps  to  say  anything  which  has  not  been 
said  before,  but  it  places  the  different  things 
which  have  been  said  by  others  in  somewhat 
different  relations  and  with  some  change  of 
emphasis.  Especially  does  it  emphasise  that 
monopoly  is  only  a  positive  evil  when  it  over- 
steps its  legitimate  bounds  and  attempts  to 
take  away  from  others  facilities  of  production 


The  Trusts  421 

already  in  their  possession.  When  the  advant- 
age to  be  monopolised  is  as  yet  unappropriated 
it  is  distinctly  to  the  advantage  of  society  that 
it  should  be  appropriated  and  utilised  in  pro- 
duction, and  the  only  means  that  has  hitherto 
accomplished  this  is  monopoly,  and  in  this  fact 
the  appropriation  of  neglected  opportunities 
finds  a  full  economic,  social,  and  ethical  justi- 
fication. This  does  not  however  give  a  title  in 
perpetuity  to  the  monopolisation.  The  legiti- 
macy of  any  title  to  opportunity  depends  en- 
tirely on  its  yielding  a  net  benefit  to  society 
as  a  whole,  including  of  course  the  monopolisers 
in  society,  and  taking  all  ethical,  social,  and 
economic  results  into  the  calculation.  This 
reduces  the  Trust  Question  (and  the  socialistic 
question  also)  simply  to  a  matter  of  propor- 
tion, which  will  be  different  for  every  separate 
industry  in  which  mankind  engages.  Any  at- 
tempt to  apply  "  Procrustean  '*  laws  to  all 
industries  alike,  or  to  classes  of  industries,  is 
not  only  doomed  to  failure  but  will  work 
inevitable  injury  to  industry  and  society. 

Our  Theory  of  the  Productive  Process  also 
indicates,  I  think,  along  what  lines  the  regula- 
tion of  trusts  and  monopolies  should  be  un- 
dertaken. Such  monopolies  as  patent  rights, 
secret  processes,  good-wills,  etc.,  which  are  in 
process  of  natural  disintegration  and  dissipa- 


422     Enterprise  and  Production 

tion,  and  such  natural  monopolies  as  land,  had 
better  be  left  alone,  subject  only  to  such  police 
regulations  as  all  industries  should  be  subjected 
to  and  to  their  productive  employment  {i.e.,  the 
owner  of  a  patent  should  not  be  allowed  to 
suppress  its  use). 

When  we  come  however  to  monopolies 
founded  on  public  franchises  or  on  the  saving 
of  cost  in  producing  in  large  quantities,  the 
question  of  regulation  divides  itself  into  two 
parts, — the  suppression  of  extortion  and  the 
gradual  transference  of  the  benefits  yielded  by 
a  new  facility  of  production  from  the  original 
appropriator  to  the  final  consumer.  Extor- 
tion results  of  course  from  monoplisers  exact- 
ing from  the  consumer  more  than  he  would 
have  had  to  pay  if  the  new  facility  had  not 
been  appropriated  and  is  wholly  indefensible, 
and  it  is  not  only  the  right  but  the  duty  of 
the  state  to  prevent  it,  though  of  course  how 
the  state  can  prevent  it  is  not  always  easily 
determined. 

When  we  come  however  to  what  may  be  called 
legitimate  monopoly  we  comprehend,  as  the 
present  view  of  the  productive  process  hardly 
teaches  us,  that  monopoly  is  not  only  a  true 
productive  factor  but  a  very  important  one,  one 
without  which  we  would  all  still  be  savages  little 
if  any  above  a  herd  of  wild  animals.     To -restrict 


The  Trusts  423 

the  individual  enterpriser  or  groups  of  enter- 
prisers from  all  appropriation  of  neglected  op- 
portunities, even  if  we  entrust  the  state,  as  the 
socialists  would  have  us  do,  with  this  part 
of  the  function  of  enterprise,  at  the  very  best 
would  retard  human  progress  and  probably  lead 
society  into  a  static  or  retrogressive  condition. 
The  problem  then  is  to  get  the  enterprisers  to 
make  all  the  legitimate  appropriations  they  pos- 
sibly can,  and  to  pay  them  as  little  for  doing  so 
as  they  can  be  persuaded  to  accept  without 
greatly  limiting  their  search  for  neglected  op- 
portunities or  their  willingness  to  employ  them 
productively  when  found. 

As  a  practical  problem  this  of  course  has  its 
difficulties,  as  all  questions  of  proportion  have, 
and  we  should  therefore  proceed  cautiously  and 
tentatively  and  should  avoid  experimenting  with 
too  many  kinds  of  industry  at  the  same  time. 
A  good  deal  will  be  accomplished  when  this 
is  recognised,  and  we  abandon  attempts  to  ac- 
complish reforms  by  sweeping  regulations  or 
by  the  rigid  application  to  all  cases  of  any  one 
or  two  great  principles. 

An  economic  problem  is  necessarily  an  at- 
tempt to  determine  the  resultant  of  several 
more  or  less  diverse  forces  rarely  working  in  the 
same  direction.  The  question  therefore  forces 
itself  upon  us  whether  the  success  of  the  trusts 


424     Enterprise  and  Production 

in  restricting  competition,  and  thereby  retaining 
for  themselves  a  longer  enjoyment  of  appro- 
priated opportunities  than  would  naturally 
occur,  sets  in  motion  any  self-acting  and  con- 
flicting tendencies  which  limit  the  ability  of 
trusts  to  accomplish  their  object.  We  have  al- 
ready seen  that  labourers  are  wholly  unable  by 
anything  they  can  do  as  labourers  to  take  away 
the  share  of  the  product  claimed  by  enterprisers, 
capitalists,  and  owners  of  opportunities.  It  is 
of  course  possible  for  them  in  their  political 
capacity  to  hamper  the  other  classes  by  more 
or  less  wise  or  unwise  legislation.  How  the  dis- 
tribution of  the  product  could  be  changed  by 
legislation  is  outside  the  present  scope  of  our 
inquiry,  which  is  confined  to  the  consideration 
of  natural  tendencies  ;  which  should  be  under- 
stood before  any  artificial  interference  with 
natural  tendencies  should  be  attempted. 

According  to  the  present  conception  of  the 
productive  process,  capital  can  never,  even  tem- 
porarily, be  excessive.  But  if  this  is  true  it  is 
difficult  to  discover  anything  which  can  prevent 
the  trusts  forever  from  retaining  all  the  bene- 
fits arising  from  a  declining  cost  of  production 
due  either  to  the  economies  of  production  on  a 
large  scale  or  to  new  discoveries  and  inventions. 
The  conception  of  the  productive  process  here 
contended  for  on  the  contrary  informs  us  that 


The  Trusts  425 

there  is  a  condition  attached  to  the  exploitation 
of  monopoly  which  must  greatly  limit  the  pos- 
sibility of  extortion.  This  condition  is  that  the 
success  of  the  trusts,  both  by  increasing  the 
inducement  to  save,  and  the  power  to  save, 
will  quickly  increase  the  pressure  of  capital  upon 
its  limitations.  The  more  rapid  the  accumula- 
tion of  unsold  goods  the  sooner  comes  the  time 
when  they  cannot  be  sold  at  cost  of  reproduc- 
tion. When  this  stage  is  reached  not  only  must 
the  trusts  stop  raising  their  prices  but  they  must 
dispose  of  them  at  the  price  the  community  can 
afford  to  pay,  which  price  will  necessarily  be 
below  cost  of  reproduction  until  the  stock  of 
unsold  commodities  is  reduced  to  normal  pro- 
portions. During  this  period  the  trusts  cannot 
exact  any  extra  profit  for  themselves.  To  the 
extent  in  which  high  profits  and  great  rentals 
stimulate  accumulation  the  attainment  of  high 
profits  and  great  rentals  is  made  difficult  and 
in  fact  impossible  beyond  certain  limits.  There 
is  only  one  way  in  which  this  counteracting  in- 
fluence can  be  escaped,  namely  by  the  owners 
of  the  trust  themselves  supplying  the  demand  for 
consumption  they  have  deprived  the  labourers 
of.  The  owners  of  successful  trusts  and  fran- 
chises will  of  course  increase  their  expenditure 
for  consumption  somewhat,  but  unless  they  are 
so  profuse  in  their  living  expenses  as  to  check 


426     Enterprise  and  Production 

the  accumulation  of  capital,  they  will  be  forced 
eventually  but  surely  to  reduce  their  prices 
below  the  cost  of  reproduction,  inclusive  of  a 
normal  profit. 

Now  as  rentals  or  royalties  are  an  element  in 
the  cost  of  reproduction  and  form  also  so  large 
a  proportion  of  the  income  of  trusts,  it  might 
be  supposed  that  a  mere  loss  of  pure  profit 
would  not  greatly  harm  the  trusts.  This  view 
of  the  matter  ignores  the  fact  however  that 
profit  can  have  a  negative  as  well  as  a  positive 
value,  and  may  be  a  loss  as  well  as  a  gain.  An 
enterpriser  who  owns  the  facilities  he  employs 
will  continue  his  production  at  a  loss  (counting 
the  rentals  that  he  theoretically  pays  to  himself 
as  an  element  of  his  cost  of  production)  so  long 
as  the  loss  is  less  than  the  rentals.  In  other 
words,  a  manufacturer  owning  his  factory  or 
renting  on  a  long  lease  will  continue  to  produce 
so  long  as  the  price  of  his  product  yields  him 
something  more  than  he  has  to  pay  out  in 
wages  and  interest,  but  will  certainly  not  add  a 
wing  to  his  factory.  If  therefore  all  industries 
were  organised  into  trusts  and  capital  continued 
to  accumulate  faster  than  the  field  for  profitable 
investment  widened,  general  prices  would  in- 
evitably be  forced  down  to  a  point  that  not 
only  left  no  profit  to  enterprise  but  absorbed  a 
large  portion  of  rentals.     When  the  reaction 


The  Trusts  427 

came  and  consumption  caught  up  with  produc- 
tion, the  field  for  investment  in  fixed  forms 
would  not  be  widened  until  the  price  of  the 
product  had  increased  to  a  point  that  restored 
these  impaired  rentals  and  the  normal  rate  of 
profit.  Manifestly  therefore  the  universal  adop- 
tion of  the  trust  system  would  not  greatly 
change  the  distribution  of  the  product  among 
the  four  functions,  however  greatly  it  disturbed 
the  distribution  of  income  among  individuals. 
And  so  far  as  there  was  any  change  in  the  dis- 
tribution according  to  function,  it  would  not 
affect  the  share  of  the  labourers  so  long  as  all 
trust  incomes  contained  the  same  proportions 
of  rentals  and  profits.  As  this  however  would 
not  be  the  case,  those  industries  in  which  the 
proportion  of  rentals  to  profits  was  small  would 
first  feel  the  pressure  of  capital  upon  its  limita- 
tions, and  would  discontinue  or  lessen  produc- 
tion before  the  larger  rentals  of  other  industries 
had  been  much  impaired.  The  burden  of  ad- 
justing capital  to  its  field  of  usefulness  would 
fall  then  on  the  industries  yielding  the  least 
for  rentals,  and  it  would  be  in  industries  of  this 
class  that  the  employment  given  to  labourers 
would  vary  the  most. 

But  though  what  has  been  said  is  true  as  a 
general  proposition,  its  force  is  greatly  modified 
by  the  fact  that  each  commodity  stands  on  its 


428     Enterprise  and  Production 

own  bottom  as  to  supply  and  demand.  The 
fact  that  those  enterprisers  who  are  also  the 
owners  of  the  advantages  and  facilities  they 
utilise  can  afford  to  continue  production  longer 
on  that  account,  will  cause  them  during  hard 
times  to  accumulate  greater  unsold  stocks  and 
thus  force  them  eventually  to  reduce  the  price 
of  their  product  to  a  lower  level  than  they 
would  have  been  forced  to  if  they  had  hired  or 
rented  their  special  facilities,  and  were  thus 
forced  to  suspend  or  lessen  their  operations 
before  the  rentals  afforded  by  their  industry 
were  impaired.  The  effect  of  this  tendency 
can  however  be  either  partly  or  fully  counter- 
acted by  the  intelligent  foresight  of  trust 
owners,  leading  them  to  slacken  their  opera- 
tions before  their  rentals  are  much  if  any 
impaired,  and  several  of  our  trusts  seem  to 
have  adopted  this  policy. 

It  is  also  to  be  noted  that  none  of  the  conse- 
quences here  depicted  will  ensue  provided  the 
lessened  consumption  of  other  classes  is  made  up 
by  the  increased  consumption  of  trust  owners. 
In  that  case  the  accumulation  of  capital  will  be 
no  more  rapid  than  before  and  the  proportion 
of  the  product  taking  the  form  of  rentals  can 
be  indefinitely  sustained,  and  the  share  of  labour 
permanently  reduced.  That  monopoly  leads  to 
some  increase  of  consumption  on  the  part  of  the 


The  Trusts  429 

rich  is  indisputable  but  it  is  equally  indisputable 
that  it  does  not  lead  to  a  corresponding  in- 
crease. Just  how  this  circumstance  affects  the 
distribution  of  the  product  among  the  functions 
is  an  intricate  question  into  which  I  cannot 
enter.  My  business  here  is  to  call  attention  to 
the  fact  that  the  subject  of  trusts  cannot  be 
very  intelligently  considered  by  any  one  who 
fails  in  his  understanding  of  the  laws  governing 
accumulation,  and  that  the  present  conception 
of  the  productive  process  denies  the  very  ex- 
istence of  the  most  important  of  these  laws. 

Another  point  of  superiority  in  our  concep- 
tion of  the  productive  process  is  to  be  found 
in  the  more  accurate  and  fuller  concept  it 
gives  us  of  the  function  of  monopoly.  It  is 
hardly  necessary  to  call  the  reader's  attention 
to  the  differences  between  our  concept  and  the 
old  one,  if  indeed  the  old  one  is  worthy  of 
being  considered  a  concept  at  all.  The  former 
possesses  a  distinctness  and  accuracy  which 
the  old  idea  lacks,  as  is  indisputably  shown 
by  nobody,  at  least  so  far  as  I  am  aware,  hav- 
ing considered  land  and  fixed  capital  as  only 
different  varieties  of  the  same  productive  factor. 
This  failure  is  due  of- course  to  the  fact  that  no 
one  seems  to  have  noticed  that  the  distinctive 
peculiarity  of  the  function  that  made  the  factor 
must  be  that  it  afforded  an  advantage  or  op- 


430     Enterprise  and  Production 

portunity  of  which  competitors  could  not, 
immediately  at  least,  avail  themselves,  conse- 
quently while  the  monopoliser  of  "  land  "  was 
recognised  as  an  economic  factor,  other  mo- 
nopolisers were  not  so  regarded.  Surely  so  in- 
adequate a  conception  is  hardly  worthy  of  the 
name. 


CHAPTER  XIII 

SOCIALISM 

AFTER  the  trusts,  what  ?  is  a  problem  of  the 
future  too  difficult  for  any  serious  attempt 
to  lift  the  veil,  until  at  least  it  has  been  deter- 
mined by  actual  experience  just  how  a  complete, 
or  comparatively  complete,  organisation  of  in- 
dustry affects  society.  The  socialists  profess  to 
welcome  the  trusts  as  a  transient  phase  of  in- 
dustrial evolution,  leading  naturally  up  to  the 
adoption  of  the  system  they  advocate.  The 
view  of  the  productive  process  here  advanced 
shows  how  mistaken  they  are  in  this  supposi- 
tion. The  change  from  the  trusts  to  complete 
socialism,  if  it  ever  occurs,  instead  of  being  a 
natural  evolution  will  be  a  revolution.  The 
two  systems  are  diametrically  opposed  in  prin- 
ciple. The  whole  history  of  production  exhibits 
the  growing  differentiation  of  the  enterpriser 
culminating  in  the  trust.  The  controlling  mo- 
tive of  industry  has  been  less  and  less  the  total- 
ity of  the  product,  and  more  and  more  the 
aggregate  of  that  part  of  the  product  which 
431 


432    Enterprise  and  Production 

accrues  to  enterprise.  The  division  of  the 
product  has  been  constantly  governed  by  a 
growing  definiteness  in  the  pre-arrangement 
that  has  made  the  process  personal  and  eco- 
nomic. The  trust,  to  be  sure,  tends  to  combine 
the  functions  of  the  appropriator  and  the  capi- 
talist with  those  of  the  enterpriser,  that  is  fewer 
opportunities  and  less  capital  are  actually  rented 
or  loaned  by  each  individual  to  others,  but  the 
different  sources  of  the  trust's  income  are  as 
purely  personal  and  as  sharply  differentiated  as 
ever.  The  profit  to  be  obtained  by  assuming 
the  responsibility  of  ownership,  and  by  the  ap- 
propriation of  disregarded  opportunities,  is  more 
than  ever  the  distinct  incentive  to  production. 
The  eagerness  for  profit  has  grown  and  not  di- 
minished, and  it  is  to  be  feared  that  callousness 
for  the  interests  of  the  other  productive  factors 
has  also  increased. 

Socialism  proposes  to  reverse  all  this  and 
substitute  the  totality  of  the  product  for  the 
expectation  of  profit  as  the  exciting  cause  of 
productive  effort.  It  proposes  to  abolish  the 
personal  incentive,  which  reaches  its  culmina- 
tion in  the  trust,  and  substitute  for  it  the  im- 
personal altruism  of  the  social  motives.  So 
radical  a  change  in  the  very  mainspring  of  in- 
dustry would  be  a  revolution  and  not  an  evo- 
lution.    It   is   indeed  true  that  the  complete 


Socialism  433 

organisation  of  any  industry  makes  it  easier  to 
confiscate  it,  just  as  it  is  easier  for  the  robber  to 
steal  bread  than  to  steal  flour  and  bake  it  into 
bread.  The  fact  that  a  man  who  has  been  robbed 
had  packed  his  goods  in  a  trunk  is  hardly  a  proof 
that  his  being  robbed  is  a  natural  and  proper 
evolution  from  his  goods  being  packed. 

The  principles  here  advocated  also  make  it 
plain  that  confiscation  is  a  necessary  preliminary 
not  only  to  every  socialistic  organisation  of  in- 
dustry, but  also  to  the  assumption  by  the  state 
of  any  existing  industry  producing  salable  com- 
modities. This  cannot  be  accomplished  without 
narrowing  the  field  for  the  investment  of  private 
capital,  unless  the  state  carries  on  the  industry 
wholly  with  capital  borrowed  from  private  citi- 
zens. And  even  then  there  is  a  restriction  of 
the  field  of  private  enterprise.  When  the  debt 
of  the  state  is  finally  paid,  the  aggregate  of 
private  capital  is  necessarily  less  by  the  amount 
of  capital  that  has  become  public  or  social.  To 
just  the  extent  that  the  state  assumes  the 
ownership  and  conduct  of  industries,  it  restricts 
the  field  of  economic  investment  and  deprives 
its  citizens  of  the  opportunity  of  entering  into 
enterprises,  accumulating  the  private  capital, 
and  seizing  the  neglected  advantages  that  are 
capable  of  being  utilised  in  such  industries. 
The  owners  of  private  property  would  be  help- 


434    Enterprise  and  Production 

less  before  the  encroachments  of  the  state  that 
engaged  in  the  policy  of  gradually  socialising 
industry.  And  when  all  industry  was  socialised 
there  could  be  no  economic  capital — that  is,  no 
private  property  except  unexchangeable  con- 
sumers' goods — left  in  the  possession  of  individ- 
uals. Whether  the  result  was  accomplished  by 
taxation,  or  by  the  saving  of  the  profits  of 
the  state-assumed  industries,  would  make  no 
difference.  No  private  possessors  of  economic 
capital  or  opportunities  would  be  left.  Possibly 
the  good  of  the  whole  might  be  held  to  justify 
this  wholesale  destruction  of  vested  interests 
and  private  opportunity,  but  it  is  idle  for  the 
socialists  to  claim  that  their  system  is  not  op- 
posed to  economic  private  property  or  that  it 
can  be  instituted  by  any  other  process  than  that 
of  confiscation,  either  open  or  disguised,  that  is, 
either  sudden  or  gradual. 

The  probable  effect  of  a  socialistic  regime  on 
individual  character  and  on  social  evolution, 
and  the  retroactive  effect  upon  the  power  to 
produce  and  the  incentive  to  its  exercise,  though 
of  supreme  importance  to  socialism  as  a  ques- 
tion, are  of  course  outside  the  purpose  of  this 
treatise.  All  that  lies  within  our  province  is 
to  show  that  it  is  the  negation  of  economic 
endeavour  and  not  the  natural  development 
from  it. 


Socialism  435 

The  advantages  of  combined  over  individual 
activity  have  been  too  much  dilated  upon  to 
require  more  than  mention  here,  but  the  ad- 
vantages and  disadvantages  of  economic  as 
compared  with  social  combination,  although 
fairly  well  recognised,  require  some  attention. 
Both  possess,  or  rather  theoretically  could  pos- 
sess, the  advantages  arising  from  combination 
of  effort.  What  advantage  in  this  one  has  over 
the  other  belongs  theoretically  to  social  activ- 
ity, as  the  state  can  effect  wider  combination 
than  any  individual  enterpriser,  even  when  a 
trust  is  the  entrepreneur.  On  the  other  hand 
the  state  cannot  make  as  efficient  a  combination 
as  the  individual  enterpriser,  because  it  cannot 
make  as  intelligent  a  selection  of  the  subsidiary 
factors.  It  must  at  the  best  be  governed  by 
general  rules,  even  if  we  suppose  all  politics  to 
be  eliminated ;  and,  as  is  exemplified  in  Civil 
Service  examinations,  no  general  rules  can  be 
formulated  that  will  result  in  any  approach  to 
the  wise  selection  of  subordinates  which  the 
individual  enterpriser  is  capable  of.  Neither 
can  the  public  intelligence,  wiser  as  it  often  is 
than  that  of  any  individual  as  to  great  questions 
of  national  expediency  and  morals,  be  expected, 
on  the  whole,  to  make  as  fortunate  selections 
of  methods  as  the  managers  of  industrial  enter- 
prises.     Just  in  proportion  as  it  descends  to 

38 


43^    Enterprise  and  Production 

details  must  state  action  decline  in  intelligence. 
Even  therefore  in  an  improved  state  of  society 
in  which  altruism  should  be  so  developed  as  to 
become  a  stronger  motive  than  personal  gain, 
the  utmost  possible  efficiency  in  the  production 
of  what  could  have  been  exchangeable  things 
would  be  less  than  that  resulting  from  individual 
initiative,  so  far  as  the  intelligent  direction  of 
industry  is  in  question.  On  the  other  hand, 
there  might  be  compensating  gains  through 
social  initiative,  in  such  a  society,  arising,  as  we 
have  seen,  from  the  wider  organisation  possible, 
and  also  from  the  greater  consideration  that 
would  be  given  to  social  and  ethical  require- 
ments, and  also,  as  in  individualistic  acts,  from 
the  ruling  object  being  the  totality  of  the  pro- 
duct rather  than  the  share  of  it  which  accrued 
as  profit.  In  an  ideal  community  these  con- 
siderations might  possibly  outweigh  the  loss  due 
to  less  intelligent  production  as  above  referred 
to.  Economic  activity  may  be  therefore  merely 
a  phase  in  the  evolution  of  the  productive  pro- 
cess, becoming  more  and  more  restricted  in  scope 
as  society  progresses  and  altruism  triumphs  over 
individualism,  though  it  is  hard  to  imagine  such 
a  state  of  human  perfection  that  the  hope  of 
definite  personal  gain  will  be  entirely  eliminated 
as  a  motive  to  combination  of  effort.  Never- 
theless society  does  progress  altruistically,  and 


Socialism  437 

as  it  progresses  one  department  of  industry- 
after  another  will  probably  be  entrusted  to  so- 
cial direction,  first  those  in  which  the  interest 
of  the  enterpriser  is  most  antagonistic  to  that 
of  the  three  subordinate  producers,  and  those  in 
which  the  character  and  amount  of  the  product 
have  the  greatest  retroactive  social  and  ethical 
influences. 

It  is  not  cynical  to  assume  that  the  supplant- 
ing of  economic  by  social  activity  must  be 
exceedingly  slow  if  a  decrease  in  the  joint  pro- 
duction of  ethical,  economic,  and  social  results 
is  to  be  avoided.  Socialism  will  differ  from  the 
present  state  of  society  indeed  in  the  very  im- 
portant particular  that  the  director  of  all  en- 
terprise and  the  recipient  of  profit  will  be  the 
people  as  a  whole,  instead  of  a  single  person 
or  group  of  persons  mainly  actuated  by  self- 
interest.  That  this  is  a  return  to  an  archaic 
and  abandoned  form  of  civilisation  is  not  ne- 
cessarily its  condemnation,  for  it  may  be  only 
another  instance  of  what  has  been  called  the 
"  spirality  of  progress,"  but  in  the  present  state 
of  human  evolution,  the  healthy  mind  nat- 
urally revolts  against  the  abnegation  of  self  in- 
volved in  complete  socialism,  which  amounts 
to  a  voluntary  slavery  of  the  individual  to  the 
state  as  a  master,  however  beneficent  and  wise 
the  social  tyranny  should  be.     So  long  how- 


43 S     Enterprise  and  Production 

ever  as  the  individual  can  retain  command  over 
the  greater  part  of  his  activities,  whether  in- 
dividualistic or  combined,  the  development  of 
individual  character  will  not  be  greatly,  or  per- 
haps badly,  affected  by  the  state's  assuming 
the  entrepreneurship  of  such  forms  of  produc- 
tion as  can  be  least  safely  trusted  to  individual 
enterprisers,  more  or  less  regardless  of  ethical 
and  social  requirements,  as  well  as  of  the  in- 
terest of  the  subsidiary  factors. 

Marx  and  his  followers  appear  to  misconceive 
the  end  they  are  struggling  for,  in  employing 
the  term  "  capitalistic  production  '*  as  an  an- 
tithesis to  socialism.  It  is  not  the  capitalist,  as 
such,  but  the  entrepreneur  to  whom  their  pro- 
posed system  is  unalterably  opposed.  Any  in- 
dustrial system  in  which  the  product  accrues 
to  the  state  is  purely  socialistic,  and  a  system 
could  be  permanently  established  in  which  the 
state  paid  rent,  interest,  and  wages  for  the  use 
of  opportunities,  capital,  and  labour,  while  re- 
serving for  itself  the  direction  and  choice  of 
enterprise  and  the  ownership  of  the  product. 
Indeed  this  is  the  only  socialistic  system  which 
would  not  involve  the  confiscation  of  vested 
interests.  It  is  probable  indeed  that  the  pos- 
sessors of  vested  interests,  when  transformed 
into  bond-holders,  would  not  long  remain  un- 
disturbed in  their  possession.     Their  income 


Socialism  439 

would  soon,  though  very  unjustly,  be  looked 
upon  as  a  tax  extorted  from  the  unpropertied 
classes,  and  little  by  little  their  rights  would  be 
infringed  upon,  so  that  a  gradual  confiscation 
would  eventually  lodge  all  the  productive  fac- 
tors in  the  state.  For,  what  socialists  are  apt 
to  ignore,  the  remaining  productive  factor,  la- 
bour, would  be  absorbed  with  the  others.  The 
state  of  course  could  then  endeavour  to  pay 
wages  in  accordance  with  the  productive  ef- 
ficiency of  the  labourer,  but  when  there  is 
only  one  employer  it  is  he  alone  who  deter- 
mines how  the  efficiency  of  each  labourer  shall 
be  valued.  When  the  choice  is  between  the 
award  of  the  state  and  starvation,  the  individ- 
ual labourer  will  have  absolutely  no  voice  in 
determining  either  the  nature  of  his  occupation 
or  its  emolument.  He  will  have  become  a 
slave,  and  necessarily  a  victim  of  injustice,  as 
it  would  require  omniscient  powers,  which  the 
state  certainly  can  never  possess,  to  apportion 
the  national  income  in  wages  with  any  near 
approach  to  equity.  At  present  each  of  us,  on 
entering  or  pursuing  the  business  of  life,  is  a 
constant  critic  of  his  own  capabihties,  and,  so 
far  at  least  as  circumstances  allow,  is  constantly 
seeking  to  discover  and  pursue  the  avocations 
for  which  he  is  best  adapted.  The  round  pegs 
do  not  always  get  into  the  round  holes,  but 


440    Enterprise  and  Production 

they  usually  secure  an  oblong  one  into  which 
they  fit  passably  well.  But  the  state  will  have 
absolutely  no  means  of  determining  the  abilities 
of  the  individual  beyond  observing  how  he  has 
comported  himself  in  the  past.  The  man,  once 
condemned  to  what  he  was  unfit  for,  would 
have  no  adequate  means  left  of  indicating  to 
the  ruling  powers  what  he  was  fitted  for.  Once 
in  a  square  hole,  he  would  be  rated  as  incapable 
of  anything  better  and  left  there,  however  hon- 
est and  intelligent  the  ruling  power  might  be. 

The  better  understanding  of  the  enterpriser's 
function — the  perception  that  it  is  not  only  the 
mainspring  but  also  the  sole  incentive  to  pro- 
duction— certainly  makes  somewhat  plainer  the 
danger  of  robbing  this  only  real  productive 
agency  of  personality.  Every  living  thing  from 
the  commencement  of  life  has  been  an  eager 
seeker  after  its  own  personal  ends.  Something 
indeed  may  occasionally  be  gained  by  subordin- 
ating personal  ends  to  social  and  ethical  require- 
ments, but  that  is  a  very  different  thing  from 
the  entire  abnegation  of  such  personal  ends  as 
are  to  be  obtained  by  combined  action,  which 
is  what  the  socialistic  scheme  requires  of  us, 
when  carried  out  to  its  legitimate  and  logical 
conclusions.  There  are,  as  has  been  pointed 
out,  undertakings  which  cannot  be  trusted 
safely  to  the  individual  enterpriser.     But  it  is 


Socialism  441 

one  thing  to  socialise  them  and   another  to 
throttle  entirely  all  individual  initiative. 

Lastly,  the  views  here  taken  of  the  scope  of 
Economics,  and  of  the  function  of  the  enter- 
priser, throw  some  light  on  the  vexed  question 
of  how  far  the  state  is  justified  in  interfering 
with  individual  and  economic  actions  and  rights. 
We  see  that  this  is  a  question  for  neither  Indi- 
vidualism, Economics,  nor  Sociology  to  decide 
alone,  but  one  that  can  be  properly  resolved 
only  by  giving  due  weight  and  consideration 
to  the  individualistic  and  social,  as  well  as  the 
economic,  results  that  will  follow.  Every  eco- 
nomic result  has  a  retroactive  influence  upon 
individual  character  and  on  social  evolution,  and 
these  in  their  turn  have  their  retroactive  in- 
fluence upon  industrial  efficiency  and  progress. 
Whenever  it  can  be  clearly  ascertained  that 
these  retroactive  influences  work  more  harm 
than  the  direct  good  obtained  by  an  action, 
whether  that  action  be  individualistic  or  eco- 
nomic, the  state  would  seem  to  be  justified  in 
regulating  or  prohibiting  it.  Of  course,  as  to  a 
great  part  of  human  activities,  the  proper  bal- 
ancing of  all  the  pros  and  cons  is  impossible  to 
our  limited  intelligence,  but  when  it  can,  with  a 
considerable  degree  of  certainty,  be  perceived 
which  way  the  balance  tends,  the  individual 
has  no  right,  by  either  doing  or  refraining  from 


442     Enterprise  and  Production 

doing,  to  bring  about  a  positive  balance  of  harm. 
Combined  effort  with  a  personal  purpose  is  only 
one  of  three  ways  of  obtaining  our  ends,  and  it  is 
not  always  the  best  way.  As  to  with  whom  the 
decision  lies  as  to  which  of  the  three  methods 
shall  be  adopted  to  secure  a  given  end,  it  is 
manifestly  the  individual  when  the  decision  lies 
between  the  individualistic  and  the  economic, 
and  as  manifestly  the  state  when  it  lies  between 
the  social  and  the  economic.  As  between  indi- 
vidualistic and  social  methods  the  responsibility 
is  divided.  To  the  extent  that  any  action  of 
the  individual  has  no  retroactive  effect  upon 
others,  the  individual  must  be  the  arbiter,  but 
when  the  safety  or  happiness  of  others  is  im- 
perilled, both  the  right  and  the  duty  devolve 
upon  the  state  of  regulating,  restricting,  or 
enforcing  individual  action,  taking  into  con- 
sideration of  course  the  interest  of  the  regu- 
lated individual  as  well  as  those  of  the  rest  of 
the  community,  and  the  hindrance  to  the  devel- 
opment of  character  always  attendant  upon  the 
restriction  of  the  individual. 

But  while  our  theory  of  the  productive  pro- 
cess (recognising  as  it  does  that  there  are  three 
possible  methods  by  which  human  beings  can 
obtain  their  ends,  each  of  which  has  a  legitimate 
field  of  its  own)  finds  a  place  for  the  partial 
socialisation  of  industries,  it  at  the  same  time 


Socialism  443 

shows  us  that  its  proper  sphere  is  a  very  limited 
one,  so  long  at  least  as  human  nature  remains 
about  what  it  now  is  and  always  has  been.  It 
also  makes  it  plain  that  the  development  of 
character  that  would  make  any  considerable 
extension  of  social  initiative  advisable  is  not 
wholly  ethical.  The  social  direction  of  industry, 
however  altruistic  those  persons  should  be  to 
whom  it  was  intrusted,  would  necessarily  be  less 
intelligent  than  when  a  personal  purpose  guides. 
The  fact  that  personal  initiative  is  primarily 
self-seeking  does  not  alter  the  fact  that  it  is 
more  intelligent  in  the  adaptation  of  means  to 
ends.  It  is  a  matter  of  common  observation 
that  the  more  honest,  scrupulous,  careful,  and  ex- 
act in  their  habits  public  officials  are  the  more 
inefficiently  the  public  business  is  conducted. 
This  is  exactly  what  is  meant  when  "  red-tape  " 
is  complained  of.  An  able  but  honest  man  will 
not  and  should  not  assume  certain  responsibili- 
ties for  others,  that  he  would  unhesitatingly 
assume  for  himself.  It  is  not  an  unusual  his- 
torical fact  that  unscrupulous  statesmen,  even 
when  their  primary  object  was  to  consolidate 
their  own  power,  or  to  line  their  own  pockets, 
have  accomplished  vastly  more  for  the  good 
of  the  nation  than  if  they  had  been  altruists. 
Witness  the  careers  of  Napoleon  and  Warren 
Hastings.     It  is   even  contended,  with    great 


444    Enterprise  and  Production 

plausibility,  that  the  regime  of  Tweed  was 
worth  to  New  York  City  many  times  its  cost. 
The  relative  incapacity  of  wisely  assuming  re- 
sponsibilities (which  our  theory  points  out  as 
far  the  most  important  of  the  productive  func- 
tions) must  always  stand  in  the  way  of  the  so- 
cialisation of  industry.  It  is  inherent  in  the 
quality  of  social  initiative. 

Again  our  theory  makes  very  plain  the  com- 
plete falsity  of  the  charge  of  exploitation  which 
the  advocates  of  socialism  never  tire  of  ringing 
the  changes  on.  To  obtain  an  advantage  by 
fraud  is  of  course  to  exploit,  but  neither  party 
to  a  free  exchange  can  be  exploited  by  the 
other,  because  each  participant  is  benefited 
or  the  exchange  would  not  take  place.  The 
slave  is  exploited  because  he  is  forced  to  exert 
himself  for  the  benefit  of  another.  But  the 
hired  labourer  exerts  himself  for  his  own  bene- 
fit. He  does  not  sell  his  effort  to  his  employer, 
but  the  result  of  his  effort.  He  transfers  a 
shovelful  of  earth  from  one  place  to  another. 
He  has  no  personal  interest  at  all  as  to  just 
where  the  shovelful  shall  fall,  but  his  employer 
has  an  interest  and  a  very  vital  interest.  The 
purpose  served  by  the  change  in  place  the 
shovelful  has  undergone  is  the  purpose  of  the 
employer,  with  which  the  labourer  as  a  labourer 
has  nothing  to  do.     Provided  the  labourer  is 


Socialism  445 

recompensed  for  his  sacrifice,  receives,  that  is,  as 
much  as  he  could  have  secured  if  he  had  done 
something  else  instead,  how  is  he  exploited  ? 
The  claim  of  the  socialists  is  that  he  is  entitled 
to  all  the  benefit  his  employer  has  derived  from 
the  change  of  place  effected.  Suppose  the 
shovelful  has  been  applied  to  stop  a  leak  in  a 
dam  and  that  a  million  of  property  has  been 
saved  by  it,  is  the  labourer  exploited  because 
the  million  saved  is  not  handed  over  to  him? 
An  extreme  case  such  as  this  shows  the  absurd- 
ity of  the  claim  that  "  labour  produces  all 
things"  and  is  exploited  when  it  receives  less 
than  all  that  is  produced.  To  suppose  that  the 
result  of  hired  labour  belongs  to  the  labourer  is 
an  especially  naive  contradiction  of  terms,  for 
the  word  "  hired  "  connotes  that  the  labourer 
sold  this  result  to  his  employer  before  he  de- 
livered it  to  him.  The  claim  therefore  involves 
the  absurdity  that  a  seller  continues  to  own 
what  he  has  sold  even  after  he  has  parted  with 
it  and  been  paid  for  it. 

No  one  intelligently  accepting  our  conception 
of  the  productive  process  could  possibly  stultify 
himself  by  either  of  the  two  suppositions  which 
underlie  all  the  assertions  and  reasonings  of  the 
advocates  of  socialism.  The  conception  once 
mastered  that  labour  is  a  subsidiary  factor  and 
only  one  of  the  three  means  by  which  a  desired 


44^     Enterprise  and  Production 

product  is  obtainable  by  the  person  who  is  will- 
ing to  subject  himself  to  the  responsibility  of 
its  creation  and  possession,  and  it  becomes  self- 
evident  that  the  performer  of  only  one  of  the 
four  functions  essential  to  production  cannot 
lay  claim  to  the  whole  product  to  the  exclusion 
of  those  who  perform  the  three  other  functions. 
Any  one  wishing  all  of  any  product  must  either 
perform  all  four  functions  himself  or  perform 
the  dominant  function  of  enterprise  himself 
and  hire  others  to  perform  the  three  subsidiary 
functions.  To  the  extent  of  course  that  any 
of  the  subsidiary  factors  are  defrauded  of  their 
proper  competitive  share  of  the  purchasing 
power  of  the  product,  wrong  is  done,  as  is 
also  the  case  when  any  part  of  the  fairly 
earned  and  legitimate  portion  of  the  dominant 
factor  is  confiscated. 

When  again  it  is  perceived  that  the  differ- 
ence between  an  economic  and  a  social  action  is 
only  in  the  method  adopted  to  attain  our  ends  or 
desires,  it  becomes  also  very  evident  that  while 
one  method  is  unquestionably  better  adapted 
to  the  attainment  of  some  ends  the  other 
method  is  as  unquestionably  better  fitted  for 
other  purposes.  This  reduces  the  question  be- 
tween the  advocates  of  the  two  methods  to  one 
of  degree  simply,  and  points  to  a  solution  dif- 
fering somewhat  for  each  sort  of  end,  for  each 


Socialism  447 

kind  of  industry.  The  contention  of  the  ex- 
treme socialists  that  social  combination  is 
destined  to  entirely  supplant  economic  com- 
bination becomes  unthinkable.  And  on  the 
other  hand  any  specific  proposal  to  transfer  the 
enterpriser's  function  from  the  individual  to 
society  in  obtaining  any  special  end  should  at 
least  be  granted  an  impartial  hearing  and  un- 
biassed judgment,  and  should  not  be  prejudged 
as  dishonest  simply  because  it  is  socialistic. 

It  seems  to  me  at  least  that  regarded  as  it 
must  be  regarded  in  the  light  of  our  theories 
the  bogy  of  socialism  loses  all  its  terror.  The 
subject  becomes  capable  of  calm  discussion  and 
cautious  judgment,  when  all  that  can  be  de- 
bated is  to  what  extent  one  method  can  sup- 
plant another  method,  the  advantages  and 
disadvantages  of  each  method  being  recognised 
by  both  disputants  and  the  only  question  be- 
tween them  being  as  to  how  the  balance  inclines 
in  the  special  case  under  consideration.  The 
mutual  denunciations — the  charges  of  robbery 
by  the  one  side  and  of  confiscation  on  the  other 
— become  ridiculous  when  the  two  methods  of 
combined  action  are  seen  to  be  equally  just  and 
legitimate,  and  the  only  ground  for  preferring 
one  to  the  other  in  any  special  case  is  its  greater 
efficiency  for  that  special  case. 


CHAPTER  XIV 

CONCLUSION 

IN  concluding  this  treatise  I  have  only  to 
add,  that  my  design  has  been  simply  to 
establish  and  defend  a  novel  view  of  some  of 
the  more  fundamental  terms  and  ideas  of  the 
Science  of  Economics.  Any  change  in  our 
fundamental  ideas  necessitates  of  course  more 
or  less  modification  of  subsidiary  propositions, 
and  some  rearrangement  of  theory.  To  trace 
out  all  these  modifications  and  rearrangements 
would  be  a  work  of  supererogation  until  my 
theory  of  the  productive  process  has  met  with 
some  degree  of  favour  and  acceptance.  As  a 
sample  of  its  applicability  to  practical  ques- 
tions, I  have  ventured  to  present,  in  the  last 
few  chapters,  a  few  conclusions  that  the  theory 
seems  to  disclose,  concerning  the  Labour  Ques- 
tion, Trusts,  and  Socialism.  And  elsewhere  I 
have  incidentally  hinted  at  its  applicability  to 
other  practical  matters.  It  seems,  to  me  at 
least,  that  the  conceptions  of  these  questions, 
448 


Conclusion  449 

thus  arrived  at,  agree  more  closely  with  the 
facts  of  the  industrial  situation,  as  we  are  accus- 
tomed to  observe  them,  and  with  the  ideas 
embedded  in  the  language,  and  more  or  less 
unconsciously  held  by  everybody,  than  the  ex- 
planations of  these  phenomena  hitherto  offered 
by  Economics.  This  of  course  is,  at  present  at 
least,  a  matter  of  opinion,  and  is  advanced  in 
the  hope  that  others,  when  their  attention  is 
called  to  it,  may  finally  come  to  agree  with  me. 
Very  likely  a  similar  examination  of  a  greater 
number  of  other  subsidiary  theories  and  prac- 
tical questions  by  the  light  of  our  theory,  would 
further  strengthen  its  verification,  but  the  task 
would  evidently  be  an  immense  one,  not  only 
beyond  the  bounds  of  my  time  and  strength, 
but  also  out  of  place  in  a  preliminary  statement 
and  estabUshment  of  a  novel  point  of  view, 
which  is  all  this  treatise  is  intended  to  attempt. 
Personally  the  author  regrets  that  the  applica- 
tion of  the  involved  principles  is  as  wide  and 
far-reaching  as  it  appears  to  be ;  for  it  will  nat- 
urally arouse  opposition  in  some  proportion  at 
least  to  its  disturbance  of  preconceptions.  He 
also  recognises  that,  if  it  had  been  possible,  a 
presentation  of  his  three  problems,  one  at  a 
time,  would  have  stood  a  better  chance  of  ac- 
ceptance, not  only  because  it  would  have  been 
more  simple  and  consecutive,  but  also  because 


450    Enterprise  and  Production 

the  reader  would  have  been  called  upon  to  give 
up  his  preconceptions  more  gradually.  The 
connections  between  the  problems  were  too 
many  and  too  intimate,  however,  to  allow  of 
this.  The  three  are  really  parts  of  one  great 
problem — that  of  the  productive  process — and 
had  to  be  treated  as  a  whole  despite  the  diffi- 
culty of  doing  so — a  difficulty  the  reader  must 
now  appreciate  and  will  allow  for.  While  this 
is  true,  however,  it  does  not  follow  that  the 
author's  conclusions  are  entirely  erroneous  un- 
less all  his  premises  are  accepted.  Even  if  it 
be  denied  that  positive  results  are  obtainable 
by  deductive  classification,  and  that  the  scope 
of  Economics  is  confined  to  the  consideration 
of  a  distinct  class  of  human  activities,  and  that 
profit  is  the  reward  of  subjection  to  responsibil- 
ities, the  great  fact  remains  that  there  is  a  rad- 
ical difference,  which  has  been  overlooked  and 
ignored,  between  those  who  furnish  the  means 
of  production  for  a  remuneration  predetermined 
jn  amount,  and  the  one  who  employs  the  means, 
furnished  him  by  others,  in  the  hope  of  thereby 
obtaining  an  unpredetermined  residue  for  him- 
self. A  radical  distinction  remains,  however 
the  function  of  the  enterpriser  is  defined,  even 
when  the  definition  is  so  illogical  as  to  connote 
that  he  also  is  nothing  but  the  furnisher  of  a 
means,   the   distinction    being   of  course   that 


Conclusion  451 

one  of  the  means  is  furnished  by  himself  in  his 
character  of  entrepreneur,  while  he  cannot  fur- 
nish the  three  other  means  in  his  own  character. 

Again,  in  view  of  the  considerations  herein 
advanced,  I  cannot  comprehend  how  any  logi- 
cal mind,  even  when  my  premises  are  not  ac- 
cepted, can  continue  to  treat  the  productive 
factors  as  fundamental  terms,  when  it  is  so  self- 
evident  that  it  is  the  exercise  of  a  peculiar 
productive  function  which  determines  and  con- 
trols the  character  of  the  productive  factor 
exercising  or  performing  it. 

Most  of  the  practical  conclusions  at  which 
I  have  arrived  and  which  differ  from  conclu- 
sions now  looked  upon  as  established  follow,  I 
think,  logically  from  these  two  premises  alone 
— namely  that  there  is  a  radical  distinction  be- 
tween the  employer  and  the  furnishers  of  the 
means  of  production,  and  that  the  factors  must 
be  defined  in  terms  of  the  functions  and  not 
the  functions  in  terms  of  the  factors.  It  will 
be  impossible  therefore  for  any  one  to  get 
away  from  our  practical  conclusions  simply  by 
refusing  to  submit  himself  to  the  restrictions  of 
method  I  have  advocated,  and  rejecting  my 
definition  of  the  science  and  my  Theory  of 
Profit. 

Nevertheless,  while  this  is  true,  it  does  not 
follow  that  the  various  theories  I  have  advanced 

29 


452     Enterprise  and  Production 

do  not  each  form  a  necessary  part  of  a  consist- 
ent whole,  and  taken  together  constitute  a  con- 
sistent theory  of  economic  production.  On 
the  other  hand,  the  conclusions,  above  referred 
to,  which  could  have  been  based  alone  on  the 
two  irrefutable  premises  I  have  called  attention 
to,  cannot  be  brought  into  close  accord  and 
logical  connection  with  any  theory  of  the  pro- 
ductive process  based  upon  the  idea  that 
Economics  is  primarily  concerned  with  the  pro- 
ductive aspect  of  all  human  actions — because 
in  two  great  classes  of  human  actions  which 
surely  have  a  productive  aspect,  namely  the 
individualistic  and  social,  there  is  no  proper 
differentiation  of  function  and  especially  no 
differentiation  of  the  employer's  function.  The 
conclusions  drawn  from  the  two  premises  are 
not  true  of  all  human  activity  but  only  of  such 
human  activities  as  are  called  into  being  by 
combination  under  the  stimulus  of  a  personal 
purpose.  They  are  true,  that  is,  only  of  in- 
dustrial or  economic  productive  activity,  as  one 
chooses  to  call  it.  They  are  not  true,  or  at 
least  wholly  true,  of  individualistic  or  social 
productive  activities,  or  of  any  aspect  of  them, 
despite  the  fact  that  all  the  productive  func- 
tions are  exercised  in  individualistic  and  social 
as  well  as  industrial  activity.  In  other  words, 
industrial  productivity  differs  so  radically  from 


Conclusion  453 

other  forms  of  productive  activity  that  we  can- 
not determine  its  laws  except  by  isolating  it, 
which  is  just  what  those  refuse  to  do  who  ob- 
ject to  our  considering  Economics  as  confined 
in  its  scope  to  the  consideration  of  a  distinct 
class  of  human  actions. 

Again  the  dim,  uncertain,  and  undefinable 
conception  of  the  scope  of  Economics,  as  con- 
cerned with  a  certain  aspect  of  all  human  ac- 
tions, cannot  lead  to  subsidiary  conceptions 
more  precise,  or  at  least  much  more  precise, 
than  itself.  The  shortcomings  of  a  major 
premise  are  inseparably  attached  to  all  conclu- 
sions based  upon  it.  So  long  as  we  have  failed 
to  obtain  a  precise  conception  of  the  nature 
and  scope  of  any  science,  we  cannot  be  sure  of 
any  classification  of  its  phenomena  based  upon 
the  indefinite  conception  we  possess.  So  soon 
however  as  we  arrive  at  a  definite  conception 
of  our  general  class,  we  are  prepared  at  once  to 
test  our  subdivisions  of  it,  and  the  inadequacy 
of  our  previous  conceptions  becomes  self-evi- 
dent. We  have  no  right  to  expect  any  great 
degree  of  accuracy  in  the  conceptions  and  de- 
finitions of  any  economist  who  has  not  arrived 
at  a  clear  conception  of  the  exact  scope  and 
character  of  the  science.  He  is  not  in  posses- 
sion of  much  which  could  afford  him  valuable 
suggestions  and  decisive  tests.     On  the  other 


454    Enterprise  and  Production 

hand,  any  one  who  has  a  distinct  conception  of 
his  general  class,  even  when  his  conception  is 
an  erroneous  one,  is  in  possession  of  something 
which  inevitably  suggests  and  tests  subsidiary 
distinctions.  And  as  the  deductive  process  is 
infallible  as  a  process,  his  subsidiary  distinc- 
tions, when  correctly  thought  out,  are  sure  to 
be  true  although  the  truth  arrived  at  may  be 
only  a  subjective  and  not  an  objective  agree- 
ment. When,  however,  put  to  the  test,  the 
agreement  proves  to  be  objective,  it  confirms 
the  reality  and  applicability  of  the  general  class 
upon  which  conclusions  have  been  based.  The 
point  which  concerns  our  special  argument  is 
this:  that  many  of  the  conclusions  which  we 
have  reached,  although  they  might  have  been 
chanced  upon  by  one  without  any  very  precise 
concept  of  the  scope  of  the  science,  were  not 
pointed  out  and  indicated  by  such  indefinite 
conceptions,  whereas  a  clear  and  precise  con- 
cept of  our  general  class  has  indicated  the  sub- 
divisions and  distinctions,  which  forced  the 
conclusions  in  question  upon  us.  The  precise 
conception  and  definition  of  the  scope  of  the 
science  has  afforded  us  a  solid  foundation  for 
our  deductions,  and  is  therefore  their  fountain- 
head,  and  the  Theory  of  the  Productive  Pro- 
cess we  have  advanced  is  a  consistent  whole, 
which  could  not  be  truly  affirmed  of  the  con- 


Conclusion  455 

ception  of  the  productive  process  arrived  at  by 
any  one  acquiescing  in  our  practical  conclu- 
sions, without  recognising  their  foundation  and 
source. 

It  would  be  beyond  the  scope  of  a  treatise 
such  as  this  to  work  out  all  the  conclusions  de- 
ducible  from  our  premises.  So  doing  would 
involve  covering  the  whole  field  of  the  science. 
I  have  ventured  to  indicate,  I  fear  very  inade- 
quately, only  a  few  of  them,  but  sufficient  I 
trust  for  the  general  line  of  my  argument.  The 
verification  of  these  conclusions  is  of  course  a 
matter  of  observation — a  matter  of  induction — 
and  I  cannot,  1  fear,  expect  that  all  observers 
will  agree  with  me,  but  surely  no  one  will  be 
found  so  hardy  as  to  deny,  for  instance,  that 
periods  do  really  occur  in  which  unsold  goods 
accumulate,  and  that  such  accumulations  of 
"  capital  goods  "  always  precede  and  accompany 
a  stagnation  of  industry,  during  which  period 
fewer  labourers  and  less  machinery  are  em- 
ployed, fewer  goods  produced,  and  smaller  sav- 
ings made.  Neither  can  it  be  gainsaid,  as  an 
observed  fact,  that  as  a  rule  times  tend  to  be- 
come prosperous  so  long  as  exports  are  relatively 
larger  than  usual,  as  compared  with  imports. 
Neither  will  the  most  pronounced  free  trader 
claim  that  the  policy  of  protecting  the  manu- 
facturers of  a  naturally  agricultural  country  has 


45^    Enterprise  and  Production 

wrought  quite  as  much  harm  as  it  should  have, 
according  to  the  arguments  founded  on  the 
dogma  of  laissez-faire  and  the  assumption  that 
profitableand  productive  are  synonymous  terms. 
These  examples  and  thousands  of  others  that 
could  be  cited  are  surely,  so  far  as  they  go,  to  be 
accepted  as  verifying  the  conclusions  we  have 
reached.  They  are  not  only  in  accord  with,  and 
explained  by  them,  but  are  also  a  posteriori  to 
conclusions  which  have  been  reached  a  priori, 
and  they  are  neither  explicable  by,  nor  in  ac- 
cordance with,  the  theory  of  the  productive 
process  now  generally  held. 

Our  theory  of  the  deductive  method  leads 
logically  to  our  definition  of  the  science,  our 
definition  of  the  science  as  logically  to  the  dif- 
ferentiation of  the  productive  functions,  and  to 
our  theories  of  enterprise,  labour,  capital,  and 
opportunity,  and  these  theories  to  some  novel 
practical  conclusions  of  which  the  few  that  have 
been  examined  by  us  appear  to  be  verifiable 
objectively.  Each  step  would  inevitably  sug- 
gest the  following  step  to  any  one  concentrating 
sufficient  thought  upon  it. 

Finally  it  may  be  prudent  to  caution  any  of 
my  readers,  not  very  familiar  with  discussions 
concerning  economic  subjects,  that  the  indus- 
trial organisation  is  not  a  machine  all  of  whose 
parts  move  synchronously.     Purposeful  move- 


Conclusion  457 

ments  must  be  directed  by  the  will,  which  can 
only  act  intelligently  after  the  perception,  al- 
ways more  or  less  indistinct  and  imperfect,  of  the 
circumstances  which  should  influence  it  and  af- 
fect its  choice.  In  the  mechanical  world  the 
mere  existence  of  a  condition  is  sufficient  to  at 
once  bring  into  being  its  necessary  results  and 
concomitants.  In  the  moral  world  the  exist- 
ence of  a  condition  has  no  influence  at  all,  until 
it  is  apprehended  and  acted  upon.  As  men 
vary  so  greatly  in  the  acuteness  of  their  percep- 
tions, a  certain  vagueness  and  indefiniteness  is 
sure  to  pervade  all  human  combinations  and  re- 
actions. Nevertheless  in  time  any  economic 
condition  is  sure  to  make  itself  felt,  but  it  takes 
time.  When  such  claims  are  made  as  that  the 
real  wages  of  one  class  of  labourers  can  be  in- 
creased only  at  the  expense  of  the  real  wages  of 
other  labourers,  it  is  not  meant  that  such  a  re- 
sult is  immediate  but  only  that  it  is  ultimate. 
The  immediate  result  of  an  increase  in  real 
wages,  not  due  to  an  increase  in  productivity,  is 
a  decline  in  profits.  But  as  such  a  decline  may 
be  distributed  among  enterprisers  in  all  sorts  of 
proportions,  a  considerable  interval  of  time  may 
elapse  before  the  perception  of  the  decline  may 
be  sufficiently  acute  to  lead  enterprisers  to  raise 
prices  or  restrict  production.  And  it  is  only 
when  they  do  this  that  the  other  labourers  com- 


45^     Enterprise  and  Production 

mence  to  pay  the  draft  drawn  upon  them  by  the 
special  class  that  has  obtained  a  rise  in  wages. 
Economic  laws  are  "  the  mills  of  the  gods  " — 
they  "  grind  slowly  but  they  grind  exceeding 
sure.**  Though  we  can  never  calculate  just 
when  the  flour  that  is  falling  from  the  stones  was 
put  into  the  hopper  in  the  shape  of  wheat,  we  do 
know  to  a  certainty  that,  if  the  mill  continues  to 
run,  the  grain  put  into  the  hopper  will  eventu- 
ally become  flour,  whatever  the  elapsed  time  be- 
tween the  two  events.  So  the  action  of  the 
economic  forces,  however  they  may  be  delayed 
and  interfered  with,  is  sure  to  eventuate  in  a 
normal  balance.  That  is,  in  the  long  run  and 
on  the  average,  the  marginal  enterpriser  will  ob- 
tain a  normal  profit  determinable  solely  by  the 
subjective  valuation  he  places  upon  the  irksome- 
ness  of  the  responsibilities  he  has  to  assume. 
Likewise  will  the  marginal  labourer  obtain  a 
normal  wage,  the  marginal  accumulator  a  nor- 
mal interest,  and  the  marginal  appropriator  a 
normal  royalty.  When  the  exigencies  of  in- 
dustry temporarily  increase  any  of  these  rates 
above  the  normal,  reactionary  and  self-adjusting 
forces  are  at  once  set  in  motion,  which  inevit- 
ably adjust  the  balance  finally,  and  if  delayed 
or  obstructed  in  their  action,  swing  the  pendu- 
lum in  the  other  direction,  so  that  on  the  average 
the  marginal  producer,  whatever  his  class,  re- 


Conclusion  45; 

ceives  exactly  his  normal  reward.  Competition 
between  individuals  is  only  possible  to  the  ex- 
tent in  which  they  exercise  the  same  function. 
Consequently  each  class  of  producers  settles  for 
itself,  by  competition  among  the  individuals 
composing  it,  what  the  normal  expectation  of 
reward  to  the  marginal  producer  of  its  class 
shall  be,  subject  of  course  to  the  limitation  that 
the  combined  normal  expectation  of  the  four 
classes  shall  not  exceed  the  totality  of  the  pro- 
duct. Thisconformity  is  established  by  changes 
in  the  normal  expectations  of  rent,  interest,  and 
wages,  and  not  by  any  change  in  the  normal  ex- 
pectation of  profit.  That  is  to  say,  when  the 
total  product  does  not  afford  a  satisfactory  resi- 
due for  the  entrepreneur,  he  does  not  change 
his  normal  expectation  of  profit,  but  decreases 
his  employment  of  opportunity  and  labour  un- 
til he  has  forced  down  their  normal  rates  to  the 
point  he  can  afford  to  allow  them.  He  does  not 
indeed  lessen  his  demand  for  capital,  but  adopts 
a  course  of  action  which  obstructs  accumulation 
and  depletes  capital,  until  his  normal  expecta- 
tionis  obtainable.  On  the  other  hand,  the  normal 
expectations  of  the  accumulator,  appropriator, 
and  labourer  are  changed  by  every  vicissitude  of 
business.  The  rents,  interest,  and  wages  obtain- 
able for  the  use  of  opportunity,  capital,  and  la- 
bour are  constantly  changing  and  cannot  on  the 


460    Enterprise  and  Production 

average  exceed  what  the  employer  can  afford  to 
pay,  and  yet  satisfy  his  own  expectation  of  gain. 
If  one  of  the  subsidiary  factors  forces  him  to  pay 
more,  he  deducts  it  from  what  he  pays  the 
others  and  not  from  his  own  profits.  If  without 
any  increase  in  total  product  rent  and  royalties 
are  permanently  raised,  it  is  at  the  expense  of 
wages  and  interest.  If  the  rate  of  pure  interest  is 
high,  rent  and  wages  suffer.  If  wages  have  ad- 
vanced, it  can  only  be  because  interest  or  royal- 
ties have  declined.  In  each  case  of  exaction,  as 
the  subsidiary  factors  have  no  direct  relation 
with  each  other,  the  deduction  is  to  be  sure  at 
first  from  profits,  but  only  temporarily  so,  as  the 
entrepreneur  at  once  lessens  production,  until  he 
recoups  himself,  and  transfers  the  incidence  of 
his  loss  to  one  or  more  of  the  three  subsidiary 
factors.  The  rate  of  profit,  for  which  any  given 
enterprise  will  be  undertaken  and  continued, 
depends  solely  upon  the  subjective  valuation 
which  enterprisers  place  upon  the  responsibil- 
ities involved,  and  all  the  influence  rentals,  in- 
terest, and  wages  have  upon  the  matter  is  the 
question  as  to  the  sufficiency  of  what  will  be 
left  after  they  are  paid  to  satisfy  this  subjective 
valuation.  If  the  expected  residue  is  not 
sufficient,  the  enterprise  will  not  be  under- 
taken, or  will  be  discontinued  if  mistakenly 
undertaken. 


Conclusion  461 

The  verification  of  the  theoretic  results  of 
economic  research  is  of  course  made  difficult  by 
this  delayed  and  spasmodic  action  of  the  eco- 
nomic forces.  And  on  this  account  the  public 
is  justified  in  a  certain  suspicion  of  theoretic  re- 
sults, and  hesitation  in  acting  upon  them.  The 
suspicion  and  hesitation,  however,  if  they  can- 
not be  expected  to  wholly  vanish,  should,  and 
undoubtedly  will,  be  greatly  lessened,  when- 
ever the  public  is  finally  convinced  that  the 
fundamental  bases  of  economic  deduction  have 
been  surely  and  firmly  established.  So  long 
as  the  best  economists  differ  among  themselves 
as  to  the  exact  scope  of  the  science  and  as  to  the 
precise  concept  of  each  of  the  productive  func- 
tions and  their  factors,  they  can  have  no  right 
to  expect  their  teaching  to  be  accepted  as  au- 
thoritative. When  there  is  no  "  consensus  of 
the  competent"  the  acquiescence  of  the  in- 
competent should  not  be  demanded  or  ex- 
pected. The  writer  is  not  so  self-sufficient  as 
to  suppose  that  he  has  uttered  the  final  word 
on  these  great  subjects,  but  he  does  hope  that 
he  has  contributed  something  towards  the  settle- 
ment, which  others  wiser  and  more  learned  than 
he  will  develop  further.  This  at  least  he  is 
sure  will  be  granted  him,  that  his  endeavour 
has  been  towards  the  resolution  of  problems 
not    only    confessedly  unsolved,  but    also  es- 


462    Enterprise  and  Production    > 

sential  to  the  further  progress  of  the  Science 
of  Economics,  and  to  its  practical  applica- 
tion to  our  every-day  life  and  struggle  for 
betterment. 


INDEX 

Accumulation,  see  Capital,  363-368 
Characteristics  of  savers,  239-242 
Limitations  of,  136,  137-143,  219-239,  246,  261, 
289-294 

Capital,  see  Accumulation,  58,  206-267 

A  fund  not  an  aggregate,  183,  254-258 

A  productive  factor,  112 

Circulating,  205 

Effects  of  crop  failure,  230-236 

Employment  of,  289-292 

Fixed,  168-182,  198,  205,  212-215,  258-260 

Function  of,  308-312 

General  glut  of,  220-229,  245 

Not  exclusively  economic,  64,  91 

Present  and  conceptions  of,  4-6,  48 

Productive  and  unproductive,  82-84,  206-211 

Risk  of,  no,  140 

Simply  a  claim  on  capital  goods,  183,  254 

Transformable  into  opportunity  or  labour  force, 
167,  194 
Classification,  see  Definition,  17-34,  35-52 

By  ends,  means,  or  methods,  53 

Principles  of,  35-52,  164,  217 
Colonies,  237,  292 
Combination  of  functions,  63 
463 


464  Index 

Communism,  58 

Consumption,  80,  96 

Co-operation,  59-60,  107 

Co-ordination,  see  Labour,  11-15,  108-110,  148 

Cost,  173,  212,  281  to  284 

Of  use  of  opportunities,  174,  212 

Pain,  281,  283 

Deduction,  9,  16-34,  35-52,  70,  loi 
Definition,  see  Classification,  17 

Of  Capital,  183,  254-258 

Of  Economics,  8,  39,  53-89, 

Of  Enterprise,  9-15,  57,  440 

Of  Labour,  14,  271-283 

Of  Opportunity,  312-315 

Present  method  of  obtaining,  3-8 

Principles  governing,  35-52 
Distribution,  80-82 

General  glut,  137-141,  219-232,  245 

Principles  of  equitable,  127-132,  270 

Enterprise,  58,  62,  106-159 

As  the  proper  point  of  view,  94-101,  102,  275,  338 

Function  of  entrepreneur,  9-15,  57,  440 

Limitations  of,  137 

Not  exclusively  economic,  64,  150 

Only  really  productive  factor,  112 

Predominance  of,  94-102,  112-115,  125-127,  132, 
141-143,    148-150,    205,    244,  ^63-267,   275, 
295-299,  331-334,  344.    440 
Entrepreneur,  see  Enterprise 
Exchange,  Science  of,  50,  72 

Factors,  Transmutation  of,  167-172,  188 


Index  465 

Field  for  investment,  see  Accumulation,  Capital,  Trade- 
Unionism,  5,  136-141,  236,  242,  289,  300 
As  affected  by  crop  failure,  230-234 
As  affected  by  panics,  136,  234-236 

Individualism,  74-77.  88,  91,  102,  119,  123,  303,  317- 
321 

Sphere  of,  116-120,  345 
Induction  vii.,  7,  16-34,  165,  281 
Industry,  71,  75,  77 
Insurance,  no,  236 
Interest,  see  Capital 

Confounded  with  profit,  10,  156 

Desirability  of  low  rate,  143 

Determination  of  rate,  236,  247-252 

Distinguished  from  rent,  169-172 

Relation  to  accumulation,  228 

Labour,  58,  266-305 

A  productive  factor,  112 

Adjustment  of  supply  to  demand,  286-289 

Aristocracy  of,  360 

Definition  of,  271 

Function  of,  307 

Inelasticity  of  labour  force,  285,  292,  353-360 

Is  co-ordination,  14,  271-283 

Not  a  commodity,  288 

Not  exclusively  economic,  64,  91 

Transformable  into  opportunity,  167 
Laissez  faire,  125,  152,  153,  294,  299,  304,  341 
Land,  see  Opportunity,  58 

A  productive  factor,  112 

Not  exclusively  economic,  64,  91 

Method,  XI.,  16-34,  loi,  104,  165,  281 
30 


466  Index 

Indirect  and  direct  methods  of  production,  65,  78 
Money,  252 

Monopoly,  see  Opportunity  and  Trusts 
Municipal  ownership,  323-329,  409 

National  debts,  Effect   on  accumulation  and  wages, 
260-263 

Opportunity,  see  Trusts  also,  160-205 
A  productive  factor,  112,  189 
Created  by  Enterprise,  135-137,  163 
Fixed  capital,  212-215 
Function  of,  312-317 
Proper  share  of,  127-130 

Panics,  136,  234-236 
Production,  81-82 

Not  exclusively  economic,  64,  114 

Productive  and  profitable,  304 

Productive  and  unproductive,  82,  206-211,  253 

Productive  aspect,  64,  74,  82-85,  342 

Productive  functions,  62,  270,  364 

Productive  process,  xi.,  62,  306-351 
Profit: 

Comparison  with  rent,  173 

Comfounded  with  interest,  10,  156 

Confounded  with  rent,  201-205 

Desirability  of  low  rate,  143,  344 

Geometrical  progression  of,  133-135 

Present  conception  of,  11      ""^ — 

Rate  of,  133,  144-146,  236,  297,  368,  395 

Risk,  theSry  of,  14,  48,  58,  85,  106-112,  202,  273, 
306 

The  only  determinant  of  volition,  94 
Protection,  301-304 


Index  467 


Purchasing  power,  65,  78 
Distribution  of,  91 

Rent,  see  Opportunity 

Comparison  with  profit,  173 
Distinguished  from  interest,  169-175 
Distinguished  from  profit,  201,  404 

Scope  of  economics,  53-89,  loa 
Present  conceptions,  8-9,  116 

Services,  320 

Socialism,  349,  431-447 

Sociology,  IV.,  74-77,  88,  102,  119,  123,  334 
Social  motive,  50,  91 
Sphere  of,  119-127,  321-329,  345 

State  Regulation,  see  Trusts,  also  441 

Trade-Unionism,  61,  349,  352-401 
Trusts,  403-447 

Unearned  increment,  158,  412 

Value,  79 

Science  of,  73 

Wages,  see  Labour  and  Trade-Unionism 
Four  significations  of,  352 
Wages  fund,  230-236,  370,  385 


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